Colour as visual rhetoric in financial reporting

Accounting Forum 28 (2004) 265–281

Colour as visual rhetoric in financial reporting John K. Courtis∗ Department of Accountancy, City University of Hong Kong, Kowloon, Hong Kong

Abstract Visual rhetoric within communication seeks to persuade through the use of picturing and encompasses words and colour. Visual rhetoric is present within annual reports. The specific role of colour in financial reporting is a neglected field of enquiry. A survey of 100 Hong Kong annual reports related colour usage to profitability change and found companies used more colour when profitability both increased and decreased. The eight most popular colours published in reports were identified and an experiment used them to proxy a pervasive form of visual rhetoric. Results show that some colours are associated with more (less) favourable perception formation and with more (less) investment allocations. Gender differences also were examined with some positive results. However, the story is not about identifying and advocating any specific colour associations for annual report usage or avoidance. The focus is about whether colour can influence perception formation and investment judgments. The evidence suggests that colour may not possess neutral effects in annual report communication. If replication studies with larger samples and in different cultural settings can corroborate this as a phenomenon then the implications may be far-reaching for annual report preparers, auditors and users. © 2004 Elsevier Ltd. All rights reserved. Keywords: Visual rhetoric; Colour; Annual reports; Perception formation; Investment decisions; Gender

1. Introduction The presence of colour in our environment is basic, integral and pervasive. Colour is fundamental to sight, identification, interpretation, perceptions and senses. Some colours evoke psychological reactions through signals such as warmth, relaxation, danger, energy, purity and death. Within the sphere of commerce, colour is important in many fields, for ∗

Tel.: +852 2788 7932; fax: +852 2788 7944. E-mail address: [email protected].

0155-9982/$ – see front matter © 2004 Elsevier Ltd. All rights reserved. doi:10.1016/j.accfor.2004.07.003

266

J.K. Courtis / Accounting Forum 28 (2004) 265–281

example: apparel, safety, cosmetics, interior design, toys, baby products, cars, paints, maps, food and drink, newspapers, magazines, comics, brand advertising and product packaging. Colour is also important (sometimes symbolically) within art, architecture, heraldry, religion, medicine, and academic faculties. Despite the ability of colour to impress and to affect moods and behaviour, the potential impact of colour as an aspect of visual rhetoric has not been examined within the sphere of financial reporting.1 The concept of visual rhetoric is grounded in an expanded notion of both pictures and language whereby someone is trying to get someone else to do or think or feel something (Kenney & Scott, 2003). It is a form of human communication that seeks to persuade through the use of picturing. The sender of a message is seeking to persuade the receiver and has chosen from a range of options such as picture, word or colour (or all three) that which is most likely to have the desired effect (Kenney & Scott, 2003). Visual rhetoric assumes both that various visual and verbal elements convey meanings and the effects of the messages. Within marketing, for example, visual rhetoric refers to the pictures used in advertising or the packaging itself. Studies of visual rhetoric focus on the picturing aspects as complementary to the selected words rather than on the colours used. However, marketing studies are inextricably tied to a context of colour in seeking affective colours and their juxtapositions. Visual rhetoric accepts the presence of colour as a part of “the whole thing” (i.e., an inherent characteristic of the comprehensive picture together with the accompanying words). Colour can be a compelling visual cue for persuasive communication purposes (Garber & Hyatt, 2003). Colour is an essential part in the reconstruction of reality from the symbols used. Colour can be used as a signalling device to impart information beyond the substance of words and numbers. Colour is pleasing to the eye. It arrests reader attention, and implies a prioritization of information presented. Skilful use of colour can portray predetermined impressions about a corporation’s financial health and prospects. Colour can add to the speed of information recognition, and it may assist in information understanding and recall. Colour is capable of directing attention to important informational items so that they will not be missed, while it is also capable of diverting attention to less important and trivial matters. Colour can highlight critical issues that are thought to be key ingredients in an investor’s decision making, while colour also can mask upsetting or negative news. Is a consideration of colour a trivial exercise? If corporations perceived colour to be inconsequential they would have no incentive to use it in document design and in the presentation of financial reports to external users. Even the most casual inspection shows that there has been an increase in worldwide use of colour in corporate annual reports over the past half-century. Covers, photographs, graphics and animation mostly appear in colour. Frequent use is made of coloured background shading to columnar and other information. While the perceived benefits of colour are not made explicit, corporations and users must 1 Lack of research interest might be attributed to its perception as irrelevant to some classes of professional users of accounting-based communication. Professional users typically generate their own reports about corporate performance and other matters. Digitized versions of annual reports are available at web sites and in other databases such as the SEC’s EDGAR Database in the USA. Financial analysts download digitized data into computer models and generate their specific reporting needs. In such cases, it is hard to imagine how colour could impact on their judgements and decision-making. However, not all professional users follow these procedures and not all users are professionals.

J.K. Courtis / Accounting Forum 28 (2004) 265–281

267

believe that the benefits outweigh the consultancy and printing costs involved. If this was not the case, the use of colour would no5t be a rational managerial decision and it would invite criticisms of wastage from users. The role of colour in the communication process of financial reporting does not appear to have been detailed in the accounting literature. Given this gap, the paper achieves two aims. First, a review of corporate annual reports identifies the frequency, application and kind of colours that appear. This survey gives us some information about the extent of colour usage. It also gives us a basis for establishing whether colour is pervasive or incidental in financial reporting. The second aim provides some elementary and tentative evidence about the use of colour as an aspect of visual rhetoric in financial reporting. A simple experiment is conducted to determine user decision-making differences when accounting information is presented on different coloured papers.

2. Literature review Colour is both a visual and a psychological stimulus. It is capable of inducing mood formation with regard to attitudes or feelings. The process is complicated because the context in which the colour is seen evokes different feelings, e.g., a red apple versus red blood. Moreover, each person’s unique past experiences with colour influences the feelings emitted when a colour is seen again, such that colour associations can be ambiguous. Therefore, although pure associations between colour and specific feelings do not exist, consensus associations based on an ad hoc evolution of societal beliefs (developed over the past two or more millennia) are habitually advocated, resulting in associations which are stereotypical but not universal (Birren, 1997).2 Colour plays a role in emotional reaction. For example, red is perceived to be the most dominant and dynamic of colours, being associated with excitement, increased restlessness and nervous tension. It is often associated with heat, anger and strong feelings. However, colour may also have contradictory qualities, depending upon the observer’s viewpoint. Green, for example, is seen objectively as cool, fresh, clear and pleasing but when illuminated on skin tones it becomes repulsive. Therefore, colour associations need to consider both objective and subjective aspects. The moods conveyed by a colour may be quite diverse because human emotions are not necessarily stable, and psychic make-up varies from person-to-person and over time. Hence, some individuals contradict stereotypical moodcolour associations which are determined via consensus opinions about the acceptability of a certain colour for a particular purpose. Colour marketing groups use survey-based colour preferences to identify trends in, inter alia, fashion, toys, and product advertising. Their findings are not based on any general theory of colour, but merely reflect consensus preferences when subjects surveyed are shown a set of colour choices. A person’s responses to colours are inherited and learned and depend on age, gender, intelligence, and education. Moreover, temperature, climate, socio-economic background and regional attitudes (i.e., culture) will also impact on colour response (Wagner, 1988). 2

Stereotypical colour associations are not universal because of the role of culture in colour perception. Different cultures associate some different colours with different feelings and activities.

268

J.K. Courtis / Accounting Forum 28 (2004) 265–281

Stereotypical colour associations determined from US evidence are shown in Table 1. Some of the associations such as Fourth of July, Halloween, Valentine’s Day, Mother’s Day and St. Patrick’s Day are inevitably culturally specific. While Birren (1997) claims that blue, red, grey, orange, and yellow colour preferences are almost identical for both sexes and all nationalities, it is an empirical question whether these stereotypical associations hold beyond the cultural boundaries of western society in general and the US culture in particular. There is no evidence to suggest that these stereotypical associations are generalizable to other cultures, especially Asian. Within the business sphere, Birren (1997) has shown that if colour is applied strategically it can create order out of chaos and help the reader to concentrate on mental tasks. Benbasat and Dexter (1986) have shown that colour can help users of financial information to improve their resource allocation decision-making, especially in high time-constraint environments. Caudill (1986) has shown that colour has influenced favourable judgments. Bohle and Garcia (1987) found that newspaper text highlighted in colour became preferential as selected reading material and without loss of content credibility. Christ (1975) showed that colour may also decrease the search time needed in locating specific information. Jeffrey and Beck (1972) showed that colour may improve the overall comprehension of issues and understanding of a problem, while producing less eye strain and fatigue. Despite a large volume of scientific literature about colour, there is no general theory of how colour causes specific perception formation. There is nothing in the accounting literature to guide annual report preparers.3 Marketing psychologists advise that a sustained colour impression is made on a subject within 90 seconds and that colour accounts for 60% of the acceptance or rejection of an object, place, individual, or circumstance (Meyers-Levy & Peracchio, 1995). Because colour impressions are made quickly and are long-lasting, decisions regarding choice of colour can be highly important to marketing success (Walker, 1988). Marketing research has also studied colour to determine its role in dramatising a product’s unique characteristics and its influence on consumer behaviour. Guest (1996) showed that colour in advertising increases the advertiser’s prestige. Levy (1984) found that colours invoke emotional responses and affect perceptions about the advertised product. Sparkman (1980) and Anderson (1988) found that colour in marketing increases retail sales by about 40%. Barnes (1990) emphasizes that colour can attract attention, help interpret product attributes, vitalize an otherwise dull-looking advertisement, and emphasize or highlight a distinctive trademark or symbol. Within corporate communications colour can be used to differentiate and emphasize items, identify or group items of a related nature, and order items sequentially (Johnson, 1992). Item differentiation can be shown through contrasting colours in pie or bar charts and graphs. Emphasis or prominence can be given to information that is highlighted in colour. Informational items can be identified or grouped in the same colour. Finally, items can be ordered sequentially or hierarchically through application of colour, especially through gradations of shading. With regard to formal corporate reporting, there is some indirect evidence that the colour ivory might be preferred to other colours (Kettlewell & Evans, 1991), and that the use of 3

Between 1971 and 2001 more than 11,000 articles containing the keyword colour were cited in ABI/INFORM CD-ROM abstracts and indexing, including approximately 800 management, marketing and business journals.

Colour

General appearance

Mental associations

Direct associations

Objective impressions

Subjective impressions

Red

Brilliant, intense, opaque, dry

Hot, fire, heat, blood

Passionate, exciting, fervid, active

Intensity, rage, rapacity, fierceness

Orange Yellow Green Blue

Bright, luminous, glowing Sunny, incandescent, radiant Clear, moist Transparent, wet

Warm, metallic, autumnal Sunlight Cool, nature, water Cold, sky, water, ice

Danger, Christmas, 4 July, St. Valentine’s, Mother’s day, flag Halloween, thanksgiving Caution Clear, St. Patrick’s day Service, flag

Hilarity, exuberance, satiety High spirit, health Ghastliness, disease, terror, guilt Gloom, fearfulness, furtiveness

Purple White Black

Deep, soft, atmospheric Spatial—light Spatial—darkness

Cool, mist, darkness, shadow Cool, snow Neutral, night, emptiness

Mourning, Easter Cleanliness, Mother’s day, flag Mourning

Jovial, lively, energetic, forceful Cheerful, inspiring, vital, celestial Quieting, refreshing, peaceful, nascent Subduing, melancholy, contemplative, sober Dignified, pompous, mournful, mystic Pure, clean, frank, youthful Funereal, ominous, deadly, depressing

a

Faber Birren, The Power of Color, Carol Publishing Group, New Jersey, 1997, p. 143.

Loneliness, desperation Brightness of sprit, normality Negation of spirit death

J.K. Courtis / Accounting Forum 28 (2004) 265–281

Table 1 Modern American colour associationsa

269

270

J.K. Courtis / Accounting Forum 28 (2004) 265–281

pastel colours as background to the presentation of information produces more positive judgments (Caudill, 1986). However, the success of colour-enhanced reporting may depend on the individual reader’s field-dependent/field-independent attribute (Benbasat & Dexter, 1985, 1986). Moreover, the literature is silent about how colour facilitates the retrieval and reading of data, communication of facts, comparison of alternatives, trend analysis, recognition and recall of information, and problem finding (Benbasat & Dexter, 1985). The use of colour in annual reports can draw attention to corporate attributes and stress particular aspects of corporate behaviour. Colour can aid in the understandability of information by emphasising and contrasting relationships. As an attribute of visual rhetoric it is a subtle form of persuasion and can contribute towards perception engineering. While the use of colour in some pictures, graphics and animation is undoubtedly motivated to enhance clarity, colour also can direct attention to information than might not otherwise have been examined. In short, colour persuades the reader to devote time to specific information. While this may be instructive, it also may be distracting. The underlying motivation behind any specific application of colour is likely to be due to one or more of three intentions. Colour may be used to make the communication vehicle more appealing so that it can compete more effectively for user time within a set of media. Colour may be used to highlight important information and to direct the analytical attention of users. Colour may be used to divert user attention away from distressing or negative information or to de-emphasise aspects of performance that might cast management in a poor light. In each case, colour is used as an aspect of visual rhetoric to persuade. In the first case, colour seeks to persuade the user to choose the annual report for examination rather than an alternative medium. In the second case, colour seeks to persuade the user to examine specific items of disclosure. In the third case, colour seeks to persuade the user to examine information that is not necessarily the most salient. Accordingly, the ability of colour to influence users should be better understood by both preparers and users of corporate information.

3. Hypotheses development Stereotypical consensus associations have shown that colour can stimulate feelings and influence mood formation. Such associations have not been studied within the accounting arena between corporate reports and external users. Given the persuasive purpose of visual rhetoric with its inclusion of colour, a fundamental question is whether the use of colour and reported profitability changes are associated. In short, do annual reports employ more overall usage of colour during the reporting of “good times” or during the reporting of “bad times”, or both? Is colour used to impart a subtle message about expected corporate profitability? Deliberate image management and perception engineering could employ the use of colour to either enhance “good news” or divert attention from “bad news”. We tested for this association by first operationalising “good/bad” news through the simple proxy of directional change in net income from the previous year. Usage of colour was measured in two ways: the frequency of appearance in an annual report, and the total

J.K. Courtis / Accounting Forum 28 (2004) 265–281

271

pagination equivalent of colour dedication.4 The first measure considers the number of instances or applications of colour, whereas the second measure considers the overall proportion of the annual report dedicated to colour. The two measures are needed because one company may have many hundreds of small applications throughout its annual report (e.g., headings, logos and animation), whereas another company may have fewer applications but more dedicated pagination. An association between colour usage and profitability results could indicate the presence of image management. Management’s actions (or those of their delegate, namely, the colour consultancy firm) would imply that colour is perceived as a non-neutral component of visual rhetoric in accounting-based communication. There is nothing inevitably pejorative implied by their actions. In this study, we can observe an ex post association but we cannot determine why management would be persuaded to engage in this form of visual rhetoric. Determining the underlying motivation of management is a separate and different kind of study. We express the hypothesis in null format. H1. There is no significant difference between the usage of colour and annual profitability change. From the point of view of investor efficient resource allocation, an important question is whether colour in annual reports is capable of influencing the perceptions and judgments of users. Can the use of a particular colour be a persuasive element in an investor’s decision to allocate higher/lower amounts of investable resources? A simple experiment was undertaken in Hong Kong to test whether popularly used colours in annual reports had any impact on perception formation and investment judgment. For the purpose of this study, colour was operationalised as background paper in the presentation of a data set of general corporate and financial information. Coloured paper is a pervasive form of visual rhetoric. 4 With regard to measurement of the frequency of colour application each page of the annual report (excluding the front and back of the cover pages) was checked for the occurrence of colour in six ways: background, words, graphics, tables, photographs and animation. The frequency of appearance in any one annual report was the aggregate of the total number of times one of the above items appeared in colour. More specifically, decision rules were determined to operationalise each of these six areas. Background was either a complete page of coloured paper (counted as one), or a coloured line occurring frequently throughout the annual report (counted as one application per page) or a colour block used for highlighting page numbers or words. Words with colour were counted as one if only a single word (or part of a word) appeared in colour, or counted as one if a block of words (such as a complete paragraph) appeared in colour. Each paragraph in colour was counted as one. Each graph or chart in colour (bar chart, pie chart, flow chart, line graph) was counted as one. Each table in colour was counted as one. Each non black and white photograph was counted as one. Animation comprised paintings, drawings and logos and were counted as one each time they appeared. The decision rules were applied consistently across the sample of 100 annual reports. Double counting was avoided; for example, paragraphs appearing against a page of coloured background was counted as one for the background, but not counted again as separate paragraphs. With regard to the measurement of colour dedication, the same six headings were used to calculate the total area of colour per page and the overall total per report. A ruler was used to measure the width and height of a colour application and converted into square centimetres, and these were added page by page across the entire report. The total square centimetres of the whole report (number of pages times the area of a single page) was then used as the denominator, and a percentage of colour dedication obtained. This was done for the reports of each company for the two consecutive years studied in order to determine whether the percentage of space used for colour increased or decreased from one year to the next.

272

J.K. Courtis / Accounting Forum 28 (2004) 265–281

While there is no compelling theory that can predict a user’s perception response to a specific colour, ad hoc psychological and marketing research has shown that stereotypical consensus associations do exist. However, whether such mood formation and perception engineering applies to the composed deliberations of readers of annual reports has not been examined in the accounting literature. The application of colour within visual rhetoric might be specific to a picture or used as general background. It is likely that different styles of application may evoke different responses. We sought to avoid the complexities of the many facets of colour usage in an exploratory study such as this. We argue that accounting-based information presented on different coloured paper is a simplistic but pervasive version of visual rhetoric. Hence, a simple experiment sought to determine whether user groups exposed to different coloured paper formed different perceptions about a corporation’s financial attributes. The null hypothesis tested is as follows. H2. There is no significant difference between group mean perceptions about corporate attributes from exposure to different background colours. The experiment sought also to determine whether mean group judgments differed with regard to an investment decision. A buy-hold-sell investment decision was operationalised as the proportion of investable resources allocated to the purchase of the company’s equities. We were investigating whether user groups indicated significant differences in overall resource allocations. If such differences were apparent, we would argue that background colour appears to have played a subtle role in judgement formation. The null hypothesis is as follows. H3. There is no significant difference between group mean investment decisions after exposure to different background colours. The possibility of a gender effect from exposure to certain colours was also examined. So and Smith (2002) and Dwyer and Moore (2001) argue that gender reactions differ to certain colours. In our experiment we investigated whether females formed statistically different perceptions and made statistically different investment decisions to their male counterparts after exposure to certain colours. The null hypotheses to test for this effect are as follows. H4a. There is no significant difference between gender perception formations after exposure to different background colours. H4b. There is no significant difference between gender investment decisions after exposure to different background colours.

4. Annual report survey Colour is used widely and internationally within annual reports as an integral component of visual rhetoric. Despite this pervasive use of colour in financial reports, the accounting literature provides no guidance about preferred colours, their juxtapositions and applications. There is no theory that prescribes when certain colours should be used and when

J.K. Courtis / Accounting Forum 28 (2004) 265–281

273

certain colours should be avoided. Marketing research has identified affective colours for brand imaging using consensus testing with consumers. No counterpart research has been reported about colours that are best for annual report covers, photographs, graphics, logos, headings, comparatives, etc. At best, corporations will relegate these decisions to professional colour consultancies. Empirical evidence about what colours are used in financial reporting is scant. In 1993, the Canadian Institute of Chartered Accountants surveyed the annual reports of 200 listed public companies. Their study, which focused on the use of graphs, found that the colours most used were blue, green, purple, gold, red, grey, and yellow. This ex post facto list provides no insights into how and why corporations select certain colours. Nor does it reveal how readers will react to certain colours in different annual report applications. Moreover, this list is likely to be culturally specific as to what are popular colours. The present study examined a random sample of 100 annual reports of Hong Kong public listed companies for the year ending 2000 so as to identify the frequency of different colour applications.5 The survey revealed that 97% included colour, and about three-quarters used colour as shading background to differentiate financial statement comparatives. Colours were used mainly in the form of photographs, animation and graphs, and in descending order of popularity were ivory, blue, green, pink, purple, grey and yellow. Ivory was most frequently used as background to corporate information. Five of the seven most popular colours are common to the Canadian and Hong Kong lists, so there appears to be some overlap between Western and Asian cultures. The seven colours identified as most popular in Hong Kong reports, plus white, were used in the perception experiment, discussed later.

5. Perception experiment Groups of senior undergraduate accountancy students were each asked to evaluate the financial health of a company and use the available information to make an investment decision. While we accept that students are not necessarily a good proxy for the experience and maturity of investors, we argue that the inexperience of students makes them more prone to impressionable stimuli, namely, visual rhetoric. If we find no significant results from student subjects, this would cast doubt about the ability of colour in communication to persuade. Composition of the groups and conditions under which the experiment was conducted were the same except that each group was exposed to different coloured background paper. Colours used in the experiment were those identified in the annual report survey to be the seven most used colours. White was added arbitrarily. For example, one group received financial information on red paper, while another group was given the same information on yellow paper, and so forth. The intention was to proxy visual rhetoric by exposing each group to a different coloured background. If colour was irrelevant we would expect no significant difference between group results. 5 The population of public companies listed on the Stock Exchange of Hong Kong at the time of the study was 581. The sample was chosen randomly and contains Hong Kong only public companies, i.e., the sample contain no foreign subsidiaries which might have conceivably affected the colours used in the experiment.

274

J.K. Courtis / Accounting Forum 28 (2004) 265–281

More specifically, the financial information comprised the chairman’s report, directors’ report, auditor’s report, and financial statements of a disguised Hong Kong listed public company. A short pilot-tested questionnaire asked subjects to judge the company’s present and expected financial condition, and to decide on the percentage of investable funds to allocate to the purchase of the company’s equities. This identical information was printed on each of eight different coloured papers.6 Given the constraints of cost and time, eight tutorial groups, each of 20 full-time undergraduate final semester accountancy students, were chosen as subjects.7 Subjects in each group were homogeneous with regard to age, gender mix, educational history and sociodemographic background. Each group received the same package of information, but on different coloured paper. The experiment, which lasted about 15 min, was conducted in the subjects’ tutorial rooms. Subjects were unaware that other tutorial groups were involved in the experiment at or about the same time. No reference was made to the coloured paper. Section A of the questionnaire asked subjects to answer 13 perception questions on an eight interval Likert scale. Questions required each subject to predict the disguised company’s future performance with regard to profit, dividends, turnover, EPS, and general financial condition. Each subject was asked to form a judgement about the percentage of their investment that they would allocate to the purchase of the company’s equities on the Stock Exchange (i.e., answers could range between zero and 100%). Section B of the questionnaire asked basic demographic questions, including gender.

6. Analysis and discussion of results In testing H1, profitability was operationalised as the percentage of net income before taxation to book value of total assets. The directional change in this profitability percentage from the year prior to 2000 was calculated for each of the sample companies. “Good” news was defined as a positive directional change and “bad” news as a negative change, the magnitude of the change being ignored. The frequency of colour applications was obtained for each sample company for both the year 2000 and the preceding year and the directional change in usage identified. In other words, if a company’s annual report for 2000 showed 100 separate incidences of colour throughout and 180 incidences in the preceding year’s report, this company’s usage would be counted as a positive increase. The magnitude of the change was not considered. The results of this combined directional analysis are shown in Table 2. 6 It is acknowledged that the experimental task is artificial. The amount of investable funds available to each student was HKD 100,000, and for a new accountancy graduate this is about one year’s salary. It is therefore not a trivial sum and would take a graduate some years to save. A fair but irrelevant question is whether these subjects would allocate the same percentages of these funds if they were dealing with their own money. We are not interested in the extent to which the investment task corresponds to reality, but rather whether background paper in different colours makes any appreciable difference between group mean judgements. 7 Students were all from the Faculty of Business at one university in Hong Kong. Each tutorial group is of a fixed size of 20 registered students. At any class a few students will be absent because of illness, job interviews, pressure of assignments, time of the day, and other reasons. We could not control actual attendance. However, all attendees participated in the experiment. Group participation sizes ranged from 14 to 19, with an average of 16.75.

J.K. Courtis / Accounting Forum 28 (2004) 265–281

275

Table 2 Change in the frequency of colour application related to directional change in rate of profitability Company behaviour

Increased colour application

Decreased colour application

Total companiesa

Increased profitability (“good” news) Decreased profitability (“bad” news)

14 (60.1%) 38 (58.5%)

9 (39.9%) 27 (41.5%)

23 (26%) 65 (74%)

a

Twelve companies showed no change in their colour application over the two years.

Of the 88 companies showing a change in their colour application, 23 (26%) experienced “good” news and 65 (74%) experienced “bad” news. Interestingly, we find that even when profitability is declining, the same proportion of companies increase (decrease) their colour application as for companies with “good” news. If H1 holds then the 23 “good” news companies should show the same proportionate distribution in the frequency of colour application as the proportionate distribution of the 65 “bad” news companies. A two-bytwo chi square test adjusted for Yates correction of continuity has a chi square statistic of 2.234, which at 1 d.f. is less than the critical value of 3.841 at the .05 level. Hence, on this measure of colour application, H1 is supported. Ceteris paribus, our expectation was that “bad” news companies would use colour with less frequency in their annual report. From an image impression management point of view, bad news companies would be motivated to do this because they seek to portray an image of cost cutting and waste avoidance. By presenting the annual report in a more sombre or conservative light during a profitability downturn, management is demonstrating awareness and control. The evidence does not support this argument. Companies experiencing “bad” news increased their usage of colour in the same proportion as companies experiencing “good” news. This behaviour would not be rational if management perceives the role of colour to be neutral in communication. More specifically, management seeks to use colour to convey optimism about the future. In this sense, colour is being used as an instrument of visual rhetoric to persuade readers favourably about expected profitability. An alternative measure of colour usage also was considered. While an annual report may show several hundred individual applications of colour these may equate to only a small number of colour page equivalents. Another annual report may have fewer applications of colour but a higher proportion of pagination in colour. Overall dedication to colour was associated with directional change in rate of profitability, and this is summarized in Table 3. To test H1 on this measure of colour usage, a chi square 2 × 2 test of independence using Yates correction for continuity shows a chi square statistic of 5.248, which at 1 d.f. is greater Table 3 Change in overall colour dedication related to directional change in rate of profitability Company behaviour

Increased colour pagination

Decreased colour pagination

Total companiesa

Increased profitability Decreased profitability

20 (71.4%) 39 (56.5%)

8 (28.6) 30 (43.5)

28 (100%) 69 (100%)

Total

59

a

38

Three companies showed no change in their overall colour dedication over the two years.

97

276

J.K. Courtis / Accounting Forum 28 (2004) 265–281

Table 4 Perceptions and investment decisions per group (colour) Group color

Number of subjects

Group perception means

Group standard deviations

Group investment means

Group standard deviations

Ivory Grey White Green Blue Yellow Purple Pink

19 15 15 18 14 19 15 19

3.90 3.89 3.74 3.66 3.63 3.63 3.56 3.23

.64 .44 .68 .57 .63 .81 .61 .62

31.81 20.67 24.80 39.19 31.86 28.20 19.00 25.39

30.01 11.96 26.20 20.05 19.82 19.33 13.84 19.96

Overall

134

3.65

.65

27.88

21.42

than the critical value of 3.841 at the .05 level. There is a significant difference between the two distributions. On this more refined measure of colour usage, H1 is not accepted. There is a marked association between increased profitability and increased colour pagination. However, there is no marked association between decreased profitability and decreased colour pagination. Both outcomes resulted in a higher proportion of companies increasing their colour pagination. This confirms our earlier argument that more colour dedication enhances both “good” and “bad” news stories. Data to test H2 was obtained from subject perceptions. Each subject scored 13 questions on a Likert scale, 0 (disagree) to 7 (agree). Subject mean responses were then converted into an overall group mean score. A high (low) mean would indicate that the group perceived the financial health of the disguised company to be strong (weak). The range is from a high of 3.9 for the group exposed to ivory coloured background paper to a low of 3.23 for the group exposed to pink coloured paper.8 The results of the experiment are arrayed by group perception means associated with specific colour exposure. These results are summarized in Table 4. A summary of t-test comparisons of the mean perception scores of each colour against each other colour is shown in Table A.1 in the Appendix. The perception means of all colour groups (except those exposed to yellow and purple coloured paper) are statistically significantly different to those exposed to pink background paper. Given the caution that these tests are performed on small sample sizes, we can tentatively state that H2 is accepted in 23 of 28 specific colour contrasts. However, five contrasts are significant compared with the pink colour. Ivory, grey, white, green and blue are all significant compared with pink. The visual rhetoric of ivory and grey is associated with the most optimistic perception formations, while the visual rhetoric of pink is associated with the most pessimistic perception formation. Ivory and pink groups were each of 19 participants. Data for testing H3 was based on subject judgements in an artificial task environment. The investable sum of HKD 100,000 given in the experiment was “play money”. Each subject could invest between 0 and 100% based on an analysis of the corporate data supplied. In 8

The literature suggests that ivory is preferred for business communication. Ivory was the second most frequently used colour found in the annual report sample.

J.K. Courtis / Accounting Forum 28 (2004) 265–281

277

approaching this task subjects will respond from different perspectives regarding risk-reward thresholds, the relative importance of informational items, investment goals, time horizons, and gender attitudes. Nevertheless, in a preliminary investigation into visual rhetoric, the experiment can give us some insights into whether colour has any impact in financial reporting. If the means are not significantly different then visual rhetoric as proxied by different coloured background papers does not appear to be of any consequence. If it is of no consequence to student subjects, it is not likely to be of any consequence to more sophisticated investors. Group mean investment scores are summarized in the second last column in Table 4. A higher mean indicates a higher proportion of allocated investable funds. The 28 t-tests reported in Appendix A (Table A.2) show significance in six cases. It must be remembered that when any large number of t-tests is undertaken, a few will likely indicate significance, but this might be statistical artefact. The six significant contrasts were green (39.19) versus pink (25.39), green versus white (24.8) (both significant at the .05 level), green versus grey (20.67), green versus purple (19), blue (31.86) versus grey (all significant at the .005 level) and blue versus purple (significant at the .0005 level). These results show that the background colour of green is associated with the highest investment allocations and is showing significantly higher allocations than by groups exposed to pink, white, grey and purple background colours. Further, results from the blue group are significantly higher than those of the grey and purple groups. The salient point is not so much that any one specific colour prevails, but that there is some prima facie evidence that visual rhetoric is associated with different judgements. We need further studies using larger samples and different cultures before concluding that any particular colour dominates judgement. It is a comfortable finding that this experiment shows that exposure to green is associated with the highest allocation of funds. We are reminded that the stereotypical association of green is with balance, normality and safety. Green is both associated with a signal of safety and with good environmental practices. This prior conditioning may have played an influential role with subjects’ investment decisions. The important issue is not directly that the green group allocated more than twice as much as did the purple group. What the evidence shows is that some colours yielded atypical results thereby indicating that visual rhetoric as proxied by colour may play a role in investment decision making. Do genders differ with regard to perceptions and judgements when exposed to different coloured backgrounds? Gender classified results are summarized in Table 5 overall and for each group. While the overall mean perception of females and males are not significantly different (3.67 and 3.63), interesting results occur when analysed by individual colours. Females experienced their highest perceptions from five colours and lowest when exposed to pink. Males experienced their highest perceptions around three colours and lowest when exposed to blue and purple. While grey and ivory are common to both genders in producing optimistic perceptions, there are no especial colours that dominate. The number one rankings of white (females) and ivory (males) may have more to do with an absence of distraction than any deliberate colour influence. The number eight rankings of pink (females) and purple (males) are curious but might be a statistical artefact. The mixture of results appears to be driven by small sample sizes. Further research is needed on larger samples about gender differences before any conclusion can be reached that specific colours make a difference.

278

J.K. Courtis / Accounting Forum 28 (2004) 265–281

Table 5 Gender-based perceptions and investment decisions per colour group Group

Number female

Number males

Perception means female

Perception means males

Investment means female

Investment means males

White Grey Yellow Ivory Blue Purple Green Pink

8 11 8 9 9 12 10 11

7 4 11 10 5 3 8 8

3.94 3.92 3.89 3.85 3.80 3.63 3.52 3.03

3.51 (5) 3.83 (3) 3.48 (6) 3.95 (1) 3.33 (7) 3.31 (8) 3.84 (2) 3.52 (4)

32.56 (5) 19.18 (8) 37.13 (2) 35.89 (3) 34.39 (4) 20.63 (7) 44.60 (1) 25.86 (6)

15.93 (7) 24.75 (4) 21.0 (6) 27.72 (2) 27.3 (3) 12.5 (8) 32.44 (1) 24.75 (4)

Overall

78

56

3.67

3.63

30.5

24.10

Size of three males in the purple group restricts any interpretation of this finding.

The overall average investment of 30.5% (females) and 24.1% (males) is significant; the t-test shows significance of 1.705 (critical value = 1.645 for 132 degrees of freedom) at the .05 level. H4b is not accepted. Females allocated significantly more funds. Green clearly dominates both genders with regard to higher investment allocations. At the lower level, purple dominates both genders.9 Further studies need to be undertaken into the visual rhetoric effects of green and purple. Larger studies need to replicate these tentative findings and determine also any cultural effects related to gender.

7. Conclusions Visual rhetoric using colour will be present in many forms in an annual report. Normally, colour would be embedded in a photograph, graphic or animation. Whether the motivation underlying these incidences of colour is marketing-based or communication based is not pertinent to our present study. We are not seeking to explore marketing and other issues that involve choices of colour and their juxtapositions. For our purposes, visual rhetoric was proxied by using coloured paper as a pervasive use of a single colour in an experimental setting. The relevant literature indicates that mood formation and perceptions can be influenced when a receptive individual is exposed to certain colours. However, within the context of the annual report and its recipients we do not know specifically how colour can help investor comprehension, pinpoint attention, shape impressions about corporate health, or determine investment decision-making. With a few exceptions, the accountancy-based literature does not examine these questions. An underlying motivation of this study, therefore, was to explore, modestly and tentatively, whether colour within financial reporting makes any difference. We have to initiate this investigation somewhere, and we chose to proxy visual rhetoric through the use of coloured paper as background to financial reports.

9

The sample size of three males in the purple group restricts any interpretation of this finding.

J.K. Courtis / Accounting Forum 28 (2004) 265–281

279

A review of 100 annual reports of public companies listed on the Hong Kong Stock Exchange for year ended 2000 showed that 97% use colour. The most frequently applied colours are blue, ivory, green, pink, purple, grey and yellow. Without a theory of colour in corporate communication, the survey findings were used pragmatically to select our background coloured papers (white was added arbitrarily). Our primary question was whether this proxy of visual rhetoric made a difference to perception formation, investment decisionmaking and gender decisions. A question of interest is whether colour is being used to enhance the reporting of “good news” and mask the reporting of “bad news”? The question is prompted by agency theory which argues that management seeks to act in its own self interests. Succinctly, the argument can be expressed thus: in good times management would use more colour as an aspect of image management to portray an enhanced favourable impression of its success. Conversely, when there is negative news to impart, management will seek to lower its usage of colour to portray an image of cost consciousness and restraint, or, as an alternative explanation it will use even more colour to mask the negative news and divert attention to other matters. In each of these scenarios, the deliberate use of colour is tied to image management. The evidence, however, is not clear-cut. We tested for an association between a change in the usage of colour and the direction of profitability change. On one measure, namely, the frequency of incidences of colour, no association was found. On another measure, namely, total colour dedication (equivalent pagination) an association was present as well as an increase in colour dedication when “bad news” was reported. Our conclusion on this latter measure is that higher dedication to colour is associated with both “good and bad news”. This finding deserves further study because it insinuates that annual report preparers perceive colour to possess positive communication attributes irrespective of the profitability outcome. Using coloured background paper as a proxy for visual rhetoric we conducted an experiment to determine whether exposure to colour might play a role in the formation of corporate perceptions, and allocation judgments. The seven colours found most frequently in Hong Kong annual reports (together with white) were used to present corporate information to subjects. Eight mutually exclusive homogeneous groups undertook the experiment, each group being exposed to a single colour. Ivory and grey were associated with higher optimistic perceptions about corporate health, while pink was associated with the least optimistic perceptions. Green was associated with the highest fund allocations, and for both genders. Purple was associated with the lowest fund allocations. Some small gender differences were noted but because of small sample sizes, no defensible conclusions can be drawn. There is some tentative evidence that genders might perceive some colours differently, but larger sample sizes and different cultural setting will need to develop this further. Finally, the story is not about identifying and championing any specific colour associations for annual report usage or avoidance. The story is about whether colour within the field of visual rhetoric plays a role in perception formation and investment judgments. The evidence of this study shows that colour may not possess neutral effects in annual report communication. If replication studies with larger samples and in different cultural settings can corroborate this phenomenon, then the implications have the potential to be quite serious for annual report preparers, auditors and users, especially in the quest for a theory of colour in corporate communication.

280

J.K. Courtis / Accounting Forum 28 (2004) 265–281

Appendix A Table A.1 t-test results of specific colour contrasts of group perceptions Grey Ivory

White

.0222

Grey

Green

Blue

Yellow

Purple

Pink

.6814

1.1503

1.1628

1.1139

1.5029

3.1588∗∗∗

.7035

1.1727

1.2568

1.1158

1.6369

3.3665∗∗∗

.3424

.4665 .1522

.4143 .1447

.7229 .4695

2.196∗∗ 2.1293∗

.0029

.2735

1.739∗

.252

1.6475 1.5068

White Green Blue Yellow Purple ∗

Significant at .05. ∗∗ Significant at .025. ∗∗∗ Significant at .005.

Table A.2 t-test results of specific colour contrasts of group resource allocations Blue Green

.9995

Blue Ivory Yellow Pink White Grey ∗

Ivory .8171 .0105

Yellow

Pink

White

Grey

Purple

1.6517

2.0403∗

1.7312∗

3.0469∗∗

3.1992∗∗

1.5719

3.5836∗∗

3.9344∗∗∗

.5151 .4115

.8937 .7235

.6581

1.3424

1.4503

.4283

.4222

1.2835

1.4787

.0728

.7861

1.0253

.537

.7324 .3411

Significant at .05. ∗∗ Significant at .005. ∗∗∗ Significant at .0005.

References Anderson, T. (1988). Color sales advantages holds firm (pp. 121). Editor and Publisher. Barnes, J.H. (1990). Using color preferences in magazine advertising. Journal of Advertising Research, 100–110. Benbasat, I., & Dexter, A. S. (1985). An experimental evaluation of graphical and color-enhanced information presentation. Management Science, November, 1348–1364. Benbasat, I., & Dexter, A. S. (1986). An investigation of the effectiveness of color and graphical information presentation under varying time constraints. MIS Quarterly, March, 59–83. Birren, F. (1997). The power of color (p. 302). New Jersey: Carol Publishing Group. Bohle, R., & Garcia, M. R. (1987). Design: The Journal of the Society of Newspaper Design, 21, 8–15.

J.K. Courtis / Accounting Forum 28 (2004) 265–281

281

Caudill, D. W. (1986). Color management: A non-verbal communication tool. Journal of Systems Management, January, 37–40. Christ, R. E. (1975). Review and analysis of color coding research for visual displays. Human Factors, 17(6(December)), 542–570. Dwyer, F. M., & Moore, D. M. (2001). The effect of gender, field dependence and color-coding on student achievement of different educational objectives. International Journal of Instructional Media, 28(3), 309–318. Garber, L. L., & Hyatt, E. M. (2003). Color as a tool for visual persuasion. In L. M. Scott & R. Batra (Eds.), Chapter 16 in persuasive imagery a consumer response perspective (pp. 313–336). New Jersey: Lawrence Erlbaum Associates. Guest, L. (1996). Status enhancement as a function of colour in advertising. Journal of Advertising Research, 6, 40–44. Jeffrey, T. E., & Beck, F. J. (1972). Intelligence information from total optical color imagery. U S Army Behavior and Systems Research Laboratory, Research Memorandum, 72–74, November. Johnson, V. (1992). The power of color. Successful Meetings, 41(7), 87–90. Kenney, K., & Scott, L. M. (2003). A review of the visual rhetoric literature. In L. M. Scott & R. Batra (Eds.), Persuasive imagery: A consumer response perspective (pp. 17–56). New Jersey: Lawrence Erlbaum Associates (Chapter 2). Kettlewell, N. M., & Evans, L. (1991). Optimizing letter design for donation requests. Psychological Reports, 68, 579–584. Levy, B. I. (1984). Research into the psychological meaning of color. American Journal of Art Therapy, 2, 58–62. Meyers-Levy, J., & Peracchio, L. A. (1995). Understanding the effects of color: How the correspondence between available and required resources affects attitudes. Journal of Consumer Research, 22(September), 121–138. So, S., & Smith, M. (2002). Colour graphics and task complexity in multivariate decision making. Accounting, Auditing & Accountability, 15(4), 565–593. Sparkman, R. (1980). The effect of sales on colour in newspaper advertisements. Journal of Advertising, 29–420. Walker, M. (1988). The power of colour (p. 182). New York: Avery Publishing.