Impression management strategy — The relationship between accounting narrative thematic bias and financial graph distortion

Abstract

Prior literature has examined 10-K narrative thematic bias and financial graph distortion as two independent outcomes that might arise from managements' efforts at impression management. Largely unexplored is an analysis of narrative thematic bias and financial graph distortion as joint and interrelated outcomes that would arise if management coordinates both in the same 10-K report as part of an impression management strategy. We fill this void in the literature by using a simultaneous equation system to examine the joint relationship between narrative thematic bias and graph distortion in the 10-K filings of S&P 500 firms from 2014 to 2018. We draw upon Paivio's (1986) dual coding theory to predict a positive association between narrative thematic bias and financial graph distortion based on the insight that graph distortion helps reinforce the effects of thematic bias, and vice versa. Consistently, we find a simultaneous and positive relationship between thematic bias and graph distortion. Further, we find that this complementary relationship is more pronounced in firms with weak corporate governance and weak external monitoring. Our findings suggest that management may exploit the reinforcing effects of thematic bias and graph distortion to leave financial statement users with a more favorable impression of firm performance.