The Impact of Presenting Financial
Information in a Distorted Format on Investor Judgments
Diane J. Janvrin
April 19, 2010
Thanks to Bill Dilla and Robyn Rasche (UNLV) for helpful discussions, Mike Doran for assistance in data collection, Andrea Biagolni, Courtney Ekeler, Leslie Pease, and Pat Wagaman for material preparation assistance.
Overview
Motivation Research Questions Methodology Results Discussion/Conclusion
Interactive Data View Example http://209.234.225.154/viewer/home/
Interactive Data Views Allows users to select presentation format
and type of information they find as most relevant
Allows users to disaggregate financial statement information and select only the information they view as most relevant.
Some allow users to perform selected calculations
Interactive Data Views May help decision makers overcome
information overload by reducing large data sets into simple visuals
Shifts cognitive load to the human perceptual system through graphics
Starting to be used on Investor Relations Websites and by the Securities and Exchange Commission
IDV Examples
SEC web site– Executive Compensation – Interactive Financial Reports
• http://viewerprototype1.com/viewer
– Financial Explorer • http://209.234.225.154/viewer/home/
Corporate web sites– Stock price information
• http://www.ford.com/about-ford/investor-relations/investment-information/stock-chart
– Enumerate - financial and non-financial information• http:///www.enumerate.com• http://production.investis.com/bp2/ia/annualdata2007/
SEC Financial ExplorerMedtronic
SEC Financial Explorer
IBM
SEC Financial Explorer Most common items graphed
– Revenues– Expenses– Income– Assets– Liabilities– Cash flow
Research Question Are non professional investors influenced by
current IDVs that present distorted financial information?
Importance of Research Demand for IDVs continues to grow SEC recently mandated that publicly held
companies furnish their financial information in XBRL format by 2011
Pozen Committee encourages research on how firms disclose financial information on corporate web sites
History - Visualization Tools Early use in genetics and biology Business applications lag the sciences by as
much as 10 years (West 1995) Today, used in marketing efforts (Lurie and
Mason 2007) Beginning to see usage in external financial
reporting – maybe internal reporting
Prior Research Users of financial information acquire and integrate data when conducting
financial analysis using three tasks (Hogarth 1980; Maines and McDaniel 2000)– Information acquisition– Information evaluation– Information combination
Hodge et al. 2004 suggest that IDVs may influence financial statement users’ ability to acquire and integrate related financial information.
Arunachalam et al. 2002 find that distorted graphical information influences investor judgment.
Several prior studies suggest that nonprofessional investor judgments are more likely to be influence by location and format of financial information
Hypothesis
Nonprofessional investors judgment will be influenced by financial information displayed in a distorted format.
Design
Trained subjects to use SEC Interactive Financial Explorer IDV Examined nine scenarios involving IDVs
– Financial information displayed: revenue, expenses, and income– All components increased, decreased, varied
In each scenario, one IDV displayed the change in financial information appropriately and one IDV distorted the change in financial information
Based on this limited information, participants were asked to make an investment decision
– Based on the information you have about changes in income from the prior period, which company are you more likely to invest in?
Subjects
154 students enrolled in accounting information systems at large public university
– 68 percent have experience evaluating firm performance– 86 percent plan to invest in stock in the next five years
20 CPAs attending continuing education session– 98 percent have experience evaluating firm performance– 95 percent currently invest in stock
Sample Scenario
Income greater– https://www.bus.iastate.edu/djanvrin/IDV/
part2incomegreater.asp Income smaller
– https://www.bus.iastate.edu/djanvrin/IDV/part2incomesmaller.asp
Income varied– https://www.bus.iastate.edu/djanvrin/IDV/
part2incomevaried.asp
Results – Investment ChoiceCPA Participants Student Participants CPA Participants Student Participants
ConditionNo Distortion Display
Company A Frequency
Company B Frequency
Company A Frequency
Company B Frequency
Company A Percent
Company B Percent
Company A Percent
Company B Percent
income greater Company B 16 3 97 27 84% 16% 78% 22%
income smaller Company A 9 10 43 100 47% 53% 30% 70%
income varied Company A 5 14 40 102 26% 74% 28% 72%
revenue greater Company A 12 7 40 57 63% 37% 41% 59%
revenue smaller Company B 13 6 80 17 68% 32% 82% 18%
revenue varied Company A 10 9 55 85 53% 47% 39% 61%
expense greater Company B 7 12 64 76 37% 63% 46% 54%
expense smaller Company A 10 9 45 51 53% 47% 47% 53%
expense varied Company A 11 8 30 68 58% 42% 31% 69%
Results – Post Project DataStudent CPA
IDV original data is distorted. 6.21 6.72
IDV original data not distorted 5.80 4.78
Green in the atomic models represents increase in value from prior period 9.41 8.74
Red in the atomic models represents decrease in value from prior period 9.11 8.58
Easy to evaluate companies' performance 5.89 1.89
Easy to make the investment decisions 5.46 1.63
Information was easy to understand 6.07 2.84
Information was easy to use 5.91 3.32
Information was presented in a useful manner 6.02 2.28
Familiarity with financial statements 7.43 7.47
Familiarity with IDV 5.15 2.84
a Responses to statements where 1 = strongly disagree and 10 = strongly agree.
Summary Expect that IDVs will become an important
communication tool for firms IDVs displaying distorted financial information
appear to influence nonprofessional investor judgment
Preliminary research – much more needs to be done
