Skip to main content
Jul 10, 2023

IR papers: Quiz edition – How well do you know IR?

Test your IR knowledge with our roundup of academic research about the profession


1. Decorative disclosure

Walmart’s 2016 digital annual report included a visualization that uses shopping cart icons to depict sales. Relative to their less math-savvy peers, how did Walmart’s most numerate investors react to the latest – perhaps disappointing – sales numbers?

a: More optimistically

b: More pessimistically

2. Your boss must disclose material weaknesses in internal controls over financial reporting. Should she deliver the news using first-person pronouns, such as ‘we’, ‘us’ and ‘our’, or use non-personal terms like ‘management’?

3. Rank US, UK and continental European fund managers from first to third according to their penchant for employing ESG screens.


1. Probably a, more optimistically than was good for them. A US experimental study finds evidence that more sophisticated investors react less positively to positive news and more negatively to negative news than those less numerate. But add a few visual embellishments like shopping cart icons, colors, pictures and so on to your information presentation and any bad news can suddenly seem a lot more palatable. The effect is absent when the news is positive.

‘Visualizations have an especially strong effect on numerated investors – particularly when performance is poor,’ explains study co-author Sohee Kim, a doctoral candidate in accountancy at the University of Kentucky and an incoming assistant professor at the University of Missouri-Kansas City. ‘Their greater processing capacity actually makes them more vulnerable to visual influence and, as a result, they may make suboptimal investment decisions.’

At the moment, the SEC has no strict regulations regarding the level or presentation format of visualizations on IR websites. ‘Managers have discretion to include visual elements, such as icons, or change chart formats as much as they like,’ Kim notes. ‘But we show the effect of visual embellishments isn’t the same for all investors in all situations. And that gives management the opportunity to send the wrong message.’

Either way, regardless of management’s intent, Kim says visuals can have decision-biasing effects and she’s calling on regulators to revisit standards and oversight of ‘visual decoration’ in IR communications. ‘The last SEC guideline on website disclosure was released in 2008,’ she notes. ‘Given the enormous growth in firms using financial performance visualizations since then, [the commission] might consider limiting or monitoring graphic embellishments.’

IR papers: Quiz edition – How well do you know IR?

2. A critical inspection of 200 internal control over financial reporting (ICFR) reports with material weakness disclosures concludes most management teams come off as defensive – particularly with the ‘reasonable assurance’ argument – and employ lots of personal pronouns. But the authors of a new experimental study say the most effective communication style is just the opposite.

‘For ICFR reports that disclose material weaknesses, first-person pronouns may associate management with the failure of the ICFR,’ says study co-author Joseph Brazel, professor of accounting at North Carolina State University. ‘That may not always be entirely true and may have the effect of rendering any excuse less effective in investors’ minds.’

At the same time, Brazel says that while management may find it tempting to strategically use the ‘reasonable assurance’ argument to fend off its responsibilities for material ICFR weaknesses, his team’s analysis shows that when communicating about an adverse event, a defensive tone sends investors exactly the wrong signal.

‘There’s an enormous disconnect between the way companies disclose their internal control problems and what our research suggests as the best communications strategy,’ says Brazel. ‘But adjusting these two relatively small aspects of your communication can really influence investment decisions.’

Did you know?

* Almost a quarter (1,595) of all management-provided ICFR reports filed with the SEC in 2021 communicated a material weakness.

* The top three most common material weaknesses communicated by management in 2021 ICFR reports were related to accounting personnel resources, segregation of duties and inadequate disclosure controls.

How to not sound defensive

You’re probably writing your ICFR ‘reasonable assurance’ paragraph all wrong. Brazel and colleagues Matthew Starliper at Texas A&M University and Yao Yu at the University of Massachusetts discovered only 1 percent of the ICFR reports in their study sample were optimally worded to both minimize defensiveness and eschew personal pronouns. At the same time, only 3.5 percent of all reports avoided first-person pronouns (using ‘management’ or similar terms instead).

Test your IR knowledge with our roundup of academic research about the profession

Ditching pronouns is easy. Now let’s see if you can present your ‘reasonable assurance’ paragraph in the least-defensive style possible. ‘A lot of the time, management teams may not even know they are being perceived as defensive,’ says Brazel.

Here’s how not to do it

‘A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Additionally, there is no assurance that any design will succeed in achieving its stated objectives under all potential future conditions. Also, projections of any evaluation of effectiveness in future periods are subject to the risk that controls will become inadequate because of changes in conditions.’

Note how management uses words that express certainty, such as ‘no matter’, ‘only’, ‘no assurance’, and so on. Research shows certainty is a key feature of a defensive tone. More subtle analysis reveals other hallmarks of defensive communication such as an underlying strategic bid to control investor attitudes.

This is a better way of putting it

Because of its inherent limitations, internal control over financial reporting and disclosure controls and procedures may not prevent or detect misstatements. But these inherent limitations are known features of the financial reporting process and it is possible to design into the process safeguards to reduce, though not eliminate, this risk.’

Experimental results found this less defensive version led to the most favorable investor reaction.           

3. Continental Europe – UK – US. A Tilburg Law School 2020 survey of more than 100 money managers shows continental European funds overall use ESG screens more than UK funds and both use them more intensively than US funds. The study also finds investors in these regions consider governance the most important ESG score component, followed by E and then S.

Your score

3/3 They say an investment in knowledge brings the most interest.

2/3 Education isn’t everything. It’s not a German Shorthaired Pointer, for example.

1/3 Thanks for playing!