Rhetoric, Risk, and Investment: Letting the Numbers Speak for Themselves

Abstract

AbstractIt is well established that words matter. Yet, there remains much that we do not understand about when and how words are best utilized in various business contexts. This study uses a mediation model to examine how investment risk influences the choice of different rhetorical frames – logos (logic), pathos (emotion), and ethos (character) – in the initial public offering (IPO) prospectus, and subsequently how rhetoric influences investment performance. We apply rhetorical theory to describe how authors use different amalgamations of words to frame messages to persuade audiences to engage in specific actions. Two key mechanisms of rhetorical theory that we investigate and build upon in this study are: 1) rhetoric reflects an author’s perspective of a context (i.e., perspective of the investment risk) and 2) the process through which cognitive resource limitations of authors and audiences influence outcomes. Specifically, we question whether these two mechanisms create a paradoxical situation where rhetoric that reflects the author’s perspective is not always the most effective approach given cognitive resource limitations. Based on a sample of 644 IPO firms, we find that using words that reflect the author’s perspective is not always the most persuasive. We posit that this is because investment authors fail to account for other communicative symbols (such as data and financial information) that can fulfill the role of more logic‐based rhetorical frames, thereby creating cognitive resource slack.