FUNDAÇÃO GETULIO VARGAS ESCOLA DE ADMINISTRAÇÃO DE EMPRESAS DE SÃO PAULO BEATRIZ ADRIANA LÓPEZ NUÑEZ THE USE AND MISUSE OF GRAPHS IN STAND-ALONE ANNUAL REPORTS EVIDENCE FROM BRAZILIAN LISTED COMPANIES SÃO PAULO 2016 FUNDAÇÃO GETULIO VARGAS ESCOLA DE ADMINISTRAÇÃO DE EMPRESAS DE SÃO PAULO BEATRIZ ADRIANA LÓPEZ NUÑEZ THE USE AND MISUSE OF GRAPHS IN STAND-ALONE ANNUAL REPORTS EVIDENCE FROM BRAZILIAN LISTED COMPANIES Thesis presented to Escola de Administração de Empresas de São Paulo of Fundação Getulio Vargas, as a reQuirement to obtain the title of Master in International Management (MPGI). KnoWledge Field: ACCOUNTING AND AUDITION Adviser: Prof. Dr. RAFAEL SCHIOZER SÃO PAULO 2016 Lopez Nuñez, Beatriz. The use and misuse of graphs in stand-alone annual reports: evidence of Brazilian listed companies / Beatriz Lopes Nuñez. - 2016. 58 f. Orientador: Rafael Felipe Schiozer Dissertação (MPGI) - Escola de Administração de Empresas de São Paulo. 1. Empresas – Brasil - Indicadores. 2. Empresas - Avaliação. 3. Amostragem (Estatística). 4. Métodos gráficos. 5.Bolsa de valores – Índices. I. Schiozer, Rafael Felipe. II. Dissertação (MPGI) - Escola de Administração de Empresas de São Paulo. III. Título. CDU 519.243 BEATRIZ ADRIANA LÓPEZ NÚÑEZ THE USE AND MISUSE OF GRAPHS IN STAND-ALONE ANNUAL REPORTS EVIDENCE FROM BRAZILIAN LISTED COMPANIES Thesis presented to Escola de Administração de Empresas de São Paulo of Fundação Getulio Vargas, as a reQuirement to obtain the title of Master in International Management (MPGI). KnoWledge Field: Accounting and Auditing Approval Date ____/____/_____ Committee members: _______________________________ Prof. Dr. Rafael Schiozer _______________________________ Prof. Dr. Joelson Sampaio _______________________________ Prof. Dr. Edilene Santana Santos Acknowledgement To my two advisors, Leonor Ferreira from Nova School of Business and Economics and Rafael Schiozer from Fundaçao Getulio Vargas, whose motivation, support and willingness were sometimes all what kept me going. Thank you for your advices and for being always there when I needed a hand. To my parents, who have encouraged my academic interests since always. Thank you for standing me during stressful times and for the ongoing incentive and inspiration over the years. To my friends and colleagues from both masters, who shared with me unforgettable experiences, enriching discussions and nice coexistence. Some of you have become essential in my life. Thank you. Abstract Previous studies have proven that graphs are often manipulated to feign a better and sometimes unreal image of the company to investors and other users of annual reports, who rely on graphical disclosure in their decision-making process. This paper uses hand collected data from the reports of a representative sample of 57 Brazilian companies that belong to the Bovespa Index in 2014, and presents an empirical analysis of the use and misuse of graphs in their annual reports. Results not only reveal that the usage of graphs in annual reports is very important to Brazilian companies, but also that there is evidence of measurement distortion (favorable deviations for the companies) and presentational enhancement. In addition, the study shows that the lower the corporate’s performance and governance, the higher the probability of measurement distortion. Although there is no evidence of selectivity, the study proves that companies with worse corporate governance are more likely to present this type of distortion. This paper expects to address this issue to preparers and users of annual reports in the country, and to draw attention of accounting regulatory institutions to formulate standard guidelines of graphical disclosure to avoid misleading information through graphs. Keywords: Use of Graphs, Misuse of Graphs, Graphical Distortion, Brazilian Listed Companies, Annual Reports Resumo Estudos anteriores já provaram que os gráficos são frequentemente manipulados para aparentar uma imagem melhor – e muitas vezes irreal – da empresa para investidores e outros usuários dos relatórios anuais, que dependem da divulgação gráfica em seu processo de decisão. Esta investigação se baseia em dados coligidos a mão dos relatórios de uma amostra de 57 empresas pertencentes ao Índice Bovespa em 2014, e apresenta uma análise empírica do uso e abuso dos gráficos em seus relatórios anuais. Os resultados deste estudo não só revelam que o uso de gráficos em relatórios é de extrema importância para as empresas Brasileiras, mas também evidencia nos gráficos distorção de medida (divergências a favor das empresas) e a violação de princípios em sua construção. Além disso, o estudo demonstra que quanto pior o desempenho e a governança corporativa da empresa, maior a probabilidade de distorção de medida nos gráficos. Apesar de não haver evidência de seletividade, o trabalho prova que é mais provável que exista este tipo de distorção nos gráficos dos relatórios das empresas com pior governança corporativa. Este estudo pretende abordar esta questão aos preparadores e usuários brasileiros de relatórios anuais e chamar atenção das instituições reguladores contábeis para que formulem diretrizes padrões para a divulgação gráfica com o objetivo de evitar informação enganosa através de gráficos. Palavras chave: Uso de Gráficos, Abuso de Gráficos, Distorçao de Gráficos, Empresas Brasileiras Listadas, Relatórios Anuais Table of Content 1. Introduction ................................................................................................................................... 9 1.1 Background ............................................................................................................................... 9 1.2 Relevance of the problem .......................................................................................................... 9 1.3 Purpose and motivation ........................................................................................................... 10 1.4 Structure of the project ............................................................................................................ 11 2. Literature Review ........................................................................................................................ 11 2.1 Key concepts ........................................................................................................................... 11 2.3 Impression management and graphical distortion ................................................................... 13 2.4 Previous empirical research .................................................................................................... 15 3. Research Design ........................................................................................................................... 18 3.1 Hypotheses .............................................................................................................................. 18 3.2 Methodology ........................................................................................................................... 21 3.3 Sample and data ...................................................................................................................... 21 3.3.1 Level of graphical disclosure ............................................................................................... 23 3.3.2 Location of graphs ............................................................................................................... 24 3.3.3 Information graphed ............................................................................................................ 24 4. Results ........................................................................................................................................... 29 4.1. Selectivity and performance ................................................................................................... 29 4.2. Selectivity and governance .................................................................................................... 32 4.3. Measurement distortion .......................................................................................................... 33 4.4. Presentational enhancement ................................................................................................... 36 5. Conclusion .................................................................................................................................... 38 References ........................................................................................................................................ 40 1. Introduction 1.1 Background The volume of information required by the capital markets’ environment has increased in the last decades. This fact, merged with the evolution of technology, has given rise to new ways of disclosing organizational data (International Federation of Accountants, 2011). Annual reports1, considered to be among the most valuable information vehicles that explain the current situation of a company to investors, have evolved from a rather small publication in the mid-nineteenth century to an elaborated and lengthy e-book (Harvard Business School, 2016). In addition, corporate report has also changed its role over the years – from a formal and mainly financial statutory document focused to meet shareholder’s interests and formal regulation to a more marketing and public relations oriented document whose audience spread also to other stakeholders, such as employees, costumers, creditors,