When was the last time you saw a broken link? Probably in that MFA site where RSS feeds related to a particular topic is simply pulled in from search engines. Or that scrappy looking -Web 2.0 site on Free icons! Bad examples there, but my point is to prove that you relate a broken link to a badly drafted site very easily.You are right.
A broken link is a bad example of SEO. First off , let’s see what a broken link is.
Usually, people link by two methods – Absolute path and Relative path.
An Absolute link is one with the complete url. Ex: – http://yourdomain.com/dir/page1.html
A Relative link is one that does not give the complete url but a relative path. Ex: – ../dir/page1.html
Both are right. But, i prefer the absolute path, let me explain why?
Search engines convert every relative path to an absolute path when recording your site pages.So irrespective of whether you use aboslute or relative paths, they end up being absolute paths with the search engines.
Moreover,chance for a broken link is more in a relative path rather than an absolute link.
Now a broken link is one that fails to connect to the target document or page.It may be because,
- The document has been moved
- The document has been renamed
- The link path is incorrect
Search engines don’t link the idea of broken links at all. They think it’s sort of deceiving them.So try not to include them in your documents.It’s very similar to a human visitor taking your site for “non-authentic” when they follow a broken link.
Broken links can harm in more than one way.
- They can harm your reputation if found in abnormal amounts.
- Can result in your site being “flagged”.
- Drop your search engine rankings.
- Put you in bad neighborhood.
What can you do to avoid broken links?
- Practice spelling words and domains correctly.
- Give absolute paths where ever possible.
- Check your links occasionally.
- Do not link to non- authentic looking websites.
- Do not link to documents of files directly, rather link to their index page.
Well, even after following rigorous checks this way, a broken link can easily crawl in. I’ve spotted several broken links on Google and Yahoo even.
The idea is to keep them to a minimal level and keep that authentic badge sticking to your header ! 
The yahoo directory used to be notorious for listing sites that were no longer live. I bet they still have a lot of sites in the directory which are no longer updated or just dead.
- Preview your posts and check any links they contain before posting them.
Johnathan is right on the money. Also if you make any major changes to WordPress, i.e. change your Permalink structure, tell the search engines any your readers in case they link directly to specific posts.
The root-relative paths seams fine for links and navigation, but RSS would be better using an absolute path.
Absolute and Relative Paths – http://www.brugbart.com/Articles/115/