ANN ARBOR—Weak companies may be able to attract investors by dressing up annual reports with strong images and appealing designs?especially if the financial information is ambiguous, a University of Michigan Business School study shows. In examining the link between aesthetics of corporate annual reports and shareholder investment decisions, U-M researchers found that the layout, images and graphic design of annual reports affect investment choices when fiscal data is lacking or vague. According to the study, when companies present clear financial information, shareholders will use it to guide investment choices, regardless of aesthetics. But when figures are unavailable or confusing, investors can be swayed by the visuals of annual reports?more often preferring those created by low-performing firms. To buffer investors? negative reactions to their financial performance, low-performing companies create visuals that are sharper and stronger than those of high performers, the researchers say.

“Drawing on potent images is one way in which managers in low-performing firms can reassure shareholders that they are in control,” says Fiona Lee, associate professor of organizational behavior and human resource management at the U-M Business School and associate professor of psychology. “Such aesthetics are more likely to communicate action in the face of bad performance. In this sense, the visuals of annual reports may provide a useful clue to the firm?s actual financial performance.” Lee and colleagues Monica Worline and Anat Rafaeli randomly crossed the aesthetics and financial data of annual reports from high-performing firms with those of low-performing firms (high performers were those whose income included earnings per share at least 50 percent greater than the previous two years; low performers had at least a 50 percent loss of earnings per share from the prior two years or had reported some kind of loss for each of the past three years).

The study?s newly devised annual reports contained no narratives or identifying brand marks, and some included no financial information at all. Participants?executives enrolled in a U-M Business School management program?were given 10,000 “chips” to invest in any of the firms in the mock reports. Not surprisingly, when balance sheets reported weak financial performance, shareholders decreased their investment in the poorly performing firms, regardless of those firms? aesthetic presentations, the researchers say. However, when no financial information was included, annual reports containing aesthetics created by low-performing firms attracted more than twice as much average investment, compared to firms with aesthetics from high performers. Even when the financial information was positive, those companies whose visuals came from annual reports of low-performing firms had a 43 percent higher average investment.

“Given the pervasive doubts about the accuracy of publicly available financial information today, people may be skeptical of reports of high financial performance and thus feel uncertain about the organization,” Lee says. “Skeptical investors may look for additional cues like aesthetics to make investment choices.” Fiona Lee – Associate professor of organizational behavior and human resource management at the U-M Business School >>