Hyperlinking Unaudited Information to Audited Financial Statements: Effects on Investor Judgments

Abstract:     
This paper provides evidence that hyperlinking a firm's audited financial statements to unaudited information in a Web-based environment facilitates a blending of the unaudited information into the audited report. I obtain evidence of this blending effect using an experiment where investors assessed the earnings potential of a firm by evaluating the firm's audited financial statements and a subsequent optimistic unaudited letter to shareholders from the firm's management. Results show that investors who viewed hyperlinked materials on the Web misclassified more unaudited information as audited, and assessed the credibility of the unaudited information as higher, than did investors who viewed hardcopy materials. Those investors who assessed the unaudited information as more credible also judged the firm's earnings potential to be higher. Notifying users with an "AUDITED/NOT AUDITED" label attenuated these effects. This evidence suggests that firms can influence financial report users' perceptions by hyperlinking unaudited information to information in their audited financial statements, and that a simple disclosure rule reduces this influence.

Keywords: World Wide Web; Financial statement analysis; Audited/unaudited; Presentation format

JEL Classification: D83, M41, M49, O33

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