Can Links to Source Financial Information Mitigate the Effect of Distorted Graphs?

• In Event: 2.02 Investor Reactions to Management Disclosures

Abstract

This study investigates whether using hyperlinks that connect summarized financial graphs with detailed financial statement information reduces the effect of graphical distortions on nonprofessional investors’ perceptions of firm performance. Using 385 participants from Amazon Mechanical Turk (M-Turk), we find that while distorted graphs do bias nonprofessional investors’ perceptions of firm performance, the provision and use of hyperlinks to the underlying source information eliminate those effects (i.e., de-bias). Using the dual-process theory of cognitive processing (Kahneman and Frederick 2002; Evans 2006, 2008), we find that hyperlinks enhance the overriding effect of System 2 processing (i.e., analytical processing) on System 1 processing (i.e., intuitive processing) and indirectly reduce the decision-biasing effect of distorted graphs on nonprofessional investors’ perceptions. The study contributes to standard setting as well as financial reporting practice by providing empirical evidence that the SEC’s policy guidance on implementing hyperlinks has benefits to nonprofessional investors. Second, it contributes to both the literature on distorted graphs and hyperlinks by suggesting hyperlinking to source data mitigates the effects of graphical distortions.

Authors

• Yibo Zhang, Miami University

• Uday S Murthy, University of South Florida

• Lisa Milici Gaynor, University of South Florida