Seeing is Believing: Annual Report "Graphicity" and Stock Returns

Abstract

Why do firms graphically enhance their annual reports that appear redundant to the 10-Ks? We develop a novel rational model to explain this. Using a large dataset, we report the first evidence that firms earn approximately 3.5% abnormal returns in the next 3 to 6 months after they initiate graphic annual reports. This is accompanied by an increase in institutional investors' holdings, consistent with our theory that firms create visuals to overcome investor inattention and help communicate subtle information to fundamental investors. This is also consistent with the fact that such firms tend to increase their R&D investments afterwards.

Keywords: Graphic Annual Reports, Images, Graph, Visual, Attention, Fundamental Strategy, Anomaly, Big Data

JEL Classification: G02, G11, G12, G14