Impression Management Strategy: The Relationship between Accounting Narrative Obfuscation and Financial Graph Distortion

Prior literature has treated the manipulation of accounting narratives and financial graphs as a separate issue. No prior study has discussed how management coordinates the quality of accounting narratives and financial graphs in the same report. I fill this knowledge gap by examining the relationship between narrative obfuscation and graph distortion in the S&P 500 firms' 10-K filings over the 2014-2018 time period. I address the potential endogeneity by jointly modeling narrative obfuscation and graph distortion in a simultaneous equation system. My finding suggests that thematic biased narrative is positively associated with financial graph distortion. At the same time, financial graph distortion is positively associated with both narrative complexity and thematic bias. These findings support Paivio's dual coding theory (1986) that managers jointly obfuscate narratives and graphs to manage users' impression of the firm. Further, I find there are systematic patterns of utilizing different narrative obfuscation methods in concert with different graphical distortion tactics. Specifically, positively biased narratives are often used in conjunction with misleading graphical designs and constructions, whereas low readable texts are often combined with inaccurate graph data. I further conduct cross-sectional analyses based on executive, board, and external monitoring characteristics. I find the positive association between narrative obfuscation and graph distortion is more pronounced for firms with CEOs who are chairmen of the boards or have low equity incentives. This positive relationship only exists for firms with small boards, busy directors, a low percentage of financial experts, or low female presence on the audit committees. Also, this positive relationship becomes more pronounced in firms with low blockholder ownership or low analyst following. This paper contributes to a better understanding of impression management executed via narrative and graphical channels. It also suggests regulators and auditors should pay more attention to the soft information quality (i.e., graphs and narratives) in the financial reports.