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The Impact of Presenting Financial Information in a Distorted Format on Investor Judgments

The Impact of Presenting Financial Information in a Distorted Format on Investor Judgments. Diane J. Janvrin April 19, 2010

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The Impact of Presenting Financial Information in a Distorted Format on Investor Judgments

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  1. 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.

  2. Overview Motivation Research Questions Methodology Results Discussion/Conclusion

  3. Interactive Data View Example http://209.234.225.154/viewer/home/

  4. 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

  5. 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

  6. 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/

  7. SEC Financial Explorer Medtronic

  8. SEC Financial Explorer IBM

  9. SEC Financial Explorer Most common items graphed Revenues Expenses Income Assets Liabilities Cash flow

  10. Research Question Are non professional investors influenced by current IDVs that present distorted financial information?

  11. 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

  12. 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

  13. 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

  14. Hypothesis • Nonprofessional investors judgment will be influenced by financial information displayed in a distorted format.

  15. 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?

  16. 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

  17. 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

  18. Results – Investment Choice

  19. Results – Post Project Data a Responsesto statements where 1 = strongly disagree and 10 = strongly agree.

  20. 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

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