The use and representational faithfulness of graphs in Australian IPO prospectuses

Abstract

This paper investigates the use of graphs, selection of variables to graph and construction of graphs in prospectuses issued by Australian companies making their initial public offering (IPO) of shares to the Australian capital market. The paper formulates and tests hypotheses concerning selectivity in the use of graphs and distortion in the construction of graphs presented in IPO prospectuses, as well as providing descriptive evidence about the use of graphs in such prospectuses. Results show that firms enjoying improving profit performance are significantly more likely to include graphs of key financial variables in their prospectuses than firms suffering deteriorating profit performance. Thus, similar to studies of graphs in annual reports, evidence of selectivity in the inclusion of graphs is found. No significant relationship is found between performance on the variable being graphed and distortion in the construction of the graph. When the graphs are split between those covering key financial variables and other variables, a significant relationship is found in both categories. For graphs of other variables, a significant positive association is found between performance and distortion. However, the relationship for key financial variables is in the opposite direction to that suggested by impression management. Further analysis identifies significant sub‐period differences in selectivity and distortion which are consistent with the view that the major regulatory and institutional changes outlined in the paper, reduced the extent of selectivity and graphical distortion in the post‐1991 period. As far as we are aware, this is the first study reported in the literature to investigate the use of graphs in prospectuses. The results also have policy implications for the regulatory authority in Australia.

The Impact of Graph Slope on Rate of Change Judgments in Corporate Reports

“…A series of studies covering several major countries has found that a significant number of financial graphs exhibited measurement distortion (i.e., the graph's physical measurement is disproportionate to the underlying numbers) (Steinbart, 1989;Beattie and Jones, 1992a, 1992b, 1996Mather et al , 1996Mather et al , , 2000Courtis, 1997;Frownfelter and Fulkerson, 1998). Moreover, certain other design and construction features (e.g., graph type selected, use of background, directional ordering of time series) appear to be manipulated in order to present corporate performance in the best possible light (Beattie andJones, 1992a, 1992b;CICA, 1993).…”

Investigating Presentational Change in U.K. Annual Reports: A Longitudinal Perspective

“…They show that measurement distortion in excess of 10% is just perceptible to users. Since 1992, there have been a succession of financial graphics studies (e.g., Beattie andJones, 2000 and2001;Courtis, 1997;Frownfelter-Lohrke and Fulkerson, 2001;Mather, Ramsay and Serry, 1996;Mather, Ramsay and Steen, 2000;and Mather, Mather and Ramsay, 2005) all of which have developed, and reinforced, the earlier findings of selectivity, measurement distortion and presentational enhancement.…”

Measurement distortion of graphs in corporate reports: an experimental study

“…Unfortunately, although the incidence of measurement distortions has been empirically demonstrated on many occasions (see, for example, Steinbart, 1989;Mather et al, 2000), these studies have been conducted without any insight into what level of measurement distortion is generally sufficient to influence a user's perception of a company's performance. As a result, the practical significance of the findings from empirical studies of company practice remains unclear.…”