A new study from North Carolina State University’s Poole College of Management shows that two simple changes to how companies write their annual reports can improve investor confidence. The focus is on “material weaknesses in internal control,” which are issues with the systems that prevent financial misstatements. When companies report these weaknesses, the way they describe them has a big impact on how investors react.

Material weaknesses are bad news for investors, who rely on accurate financial reports. The Sarbanes-Oxley Act requires companies to disclose the state of their internal controls, but the study found that the tone of these disclosures matters as much as the content.

The researchers wanted to know whether investors respond better when companies admit fault instead of being defensive, and whether it makes a difference if the report uses first-person pronouns like “we” or “our,” or refers specifically to management.

Boosting confidence

To find out, the team looked at 200 internal control reports from publicly traded companies and then ran an experiment with 96 MBA students playing the role of investors.

Interestingly, most companies used defensive language and first-person pronouns—precisely the opposite of what the study found to be effective.

The experiment revealed that investors were more willing to invest in companies that avoided first-person pronouns and adopted a more open tone. They responded best to reports that acknowledged weaknesses and explained how the company was addressing them.

Previous research shows that being defensive when delivering bad news makes things worse. Using “we” or “our” places more blame on management, but directly referring to management can soften the impact.

The takeaway? The words companies use in reports matter. By changing their language, companies can boost investor trust without spending much.