News Release

‘Boilerplate language’ is preventing non-professional investors from making sound decisions, new research finds

Reports and Proceedings

Aston University

New research from Aston University has found boilerplate language used by managers is preventing their non-professional investors from making sound decisions.

Dr Ozlem Arikan examined the impact of the style of corporate information on non-professional investor decisions.

The term ‘boilerplate’ refers to standardised text, copy, documents, methods or procedures that may be used over again without making major changes to the original. In the context of risk disclosures as studied by Dr Arikan, boilerplate description of risks entails a generic list of risks that are common to all industry, rather than including details relating to risks specific to that entity.

Regulators are concerned about generic disclosures which they label as boilerplate; they warn that disclosures which do not have enough details do not help investors to make sound decisions. 

An example of a boilerplate can be found in Google’s risk disclosure which cites social media companies as its main competitors without specifying Facebook, an obvious competitor to Google in terms of generating online advertising revenues.

Dr Arikan found that although some investors are less likely to invest in a company when its disclosure is specific, this only happens when they had some knowledge about the issue disclosed.

However, when the disclosed risk materialises, investors rate boilerplate managers as less credible than specific managers and are less likely to invest in these companies. 

Dr Ozlem Arikan, senior lecturer in accounting at Aston Business School, said:

“My research suggests the Financial Reporting Council has been right all along about ‘boilerplate language’ preventing non-professional investors from making sound decisions, and it is not good for companies either.

“When companies are evasive about their risks, they neither help themselves nor their investors.

“Companies arguably avoid being specific to avoid negative reactions of the investors. For example, Google presumably avoids mentioning Facebook as it does not want to make Facebook’s threat to its business too explicit. However, my research suggests that companies do not necessarily avoid negative reactions by being boilerplate. 

“Regulators may wish to guide companies in how to make more specific disclosures, which are more useful to investors in their decision-making than their boilerplate counterparts.

“Importantly boilerplate language does not give enough warnings to investors as those who read a boilerplate risk warning are more surprised when the risk materialises and they correct their previous decisions to a greater extent than investors who read the specific information”

You can read the full paper, The effect of boilerplate language on nonprofessional investors’ judgmentsHERE.

You can find out more about Dr Arikan’s previous research HERE.

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