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

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 –Financial Explorer Corporate web sites –Stock price information –Enumerate - financial and non-financial information

SEC Financial Explorer Medtronic

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 suggest that IDVs may influence financial statement users’ ability to acquire and integrate related financial information. Arunachalam et al 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 – megreater.asphttps:// megreater.asp Income smaller – mesmaller.asphttps:// mesmaller.asp Income varied – mevaried.asphttps:// mevaried.asp

Results – Investment Choice CPA Participants Student Participants CPA Participants Student Participants Condition No 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 greaterCompany B %16%78%22% income smallerCompany A %53%30%70% income variedCompany A %74%28%72% revenue greaterCompany A %37%41%59% revenue smallerCompany B %32%82%18% revenue variedCompany A %47%39%61% expense greaterCompany B %63%46%54% expense smallerCompany A %47% 53% expense variedCompany A %42%31%69%

Results – Post Project Data Student CPA IDV original data is distorted IDV original data not distorted Green in the atomic models represents increase in value from prior period Red in the atomic models represents decrease in value from prior period Easy to evaluate companies' performance Easy to make the investment decisions Information was easy to understand Information was easy to use Information was presented in a useful manner Familiarity with financial statements Familiarity with IDV 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