Three Essays on Digital Annual Reports for Nonprofessional Investors: The Impacts of Presentation Formats on Investment-Related Judgments and Decisions

The goal of this dissertation is to investigate the impact of presentation formats on nonprofessional investors’ impressions of firm performance in the context of digital annual reports. The dissertation implements a three-essay approach. Essay 1 examines whether the effect of positive/negative financial performance news on nonprofessional investors’ impressions of management and firm performance depends on whether the graphical display of that news is vivid or pallid. Conducting a 2 x 2 between-participants experiment with 470 participants from Amazon Mechanical Turk (M-Turk), I find that when the news is positive, presenting graphs vividly allows nonprofessional investors to have a more positive impression of management and firm performance. In contrast, when the news is negative, presenting graphs vividly has little effect on nonprofessional investors’ impressions. The essay informs regulators and practice by demonstrating that vivid graphical website disclosures can significantly affect the behavior of nonprofessional investors when the financial performance news is positive, but the effect is minimal when the news is negative. The essay also contributes to the financial disclosure literature by demonstrating the impact of graphical vividness in presenting financial performance information. Essay 2 conducts a 2 x 2 between-participants experiment with 565 participants from M-Turk. I investigate whether varying the user interactivity and graphical vividness of the presentation of non-financial good news counteracts bad news presented in the audited financial data. I find a positive effect of user interactivity when the graphical presentation of non-financial information is vivid but not when it is pallid. In mediation analyses, I find unexpected results in that user engagement negatively mediates the effects of user interactivity on nonprofessional investors’ perceptions of firm performance and investment-related judgments and decisions. Subsequent analyses indicate that user interactivity alone reduces nonprofessional investors’ satisfaction with digital annual reports, but the joint effect of user interactivity and graphical vividness overcomes this negative effect. These results have implications for designers of digital annual reports, investor groups consuming this information, and regulators concerned about the need for assurance on the (unregulated) non-financial disclosures in annual reports. Essay 3 studies 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 M-Turk, I 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., debias). Using the dual-process theory of cognitive processing (Kahneman and Frederick 2002; Evans 2006, 2008), I 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 as a technique to mitigate the effects of graphical distortions. The findings of the three essays have implications for the designers of digital annual reports, investor groups consuming this information, and regulators concerned about the need to standardize the presentation formats in digital annual reports and potentially require auditor oversight of graphical displays of both financial and non-financial data in these reports