Manipulation and Obfuscation of the Financial Report

32 Pages Posted: 22 Jun 2020 Last revised: 27 Oct 2021

See all articles by Nikolaj Niebuhr Lambertsen

Nikolaj Niebuhr Lambertsen

Aarhus University - Department of Economics and Business Economics

Date Written: May 27, 2020


I model a signaling game of strategic reporting where the manager can bias and obfuscate the financial report in a market where investors only pay attention to randomly sampled parts of the financial report and then extrapolate the value of the firm based on this. The manager can inflate the stock price by obfuscating the financial report. This is done by disaggregating the report into a set of non-negative signals, capturing the profitability of different activities within the firm, whose mean is constrained to be equal to the reported profitability of the firm. Biasing the reported profitability increases the possible degree of obfuscation, incentivizing a larger bias, and causes mispricing if investors do not foresee the consequences of their extrapolative nature on the manager's reporting strategy. Even in the presence of extrapolative investors, the manager is never better off ex-ante by being able to bias, and if investors foresee the manager's strategic decisions, the bias will perfectly unravel and the manager's cost of biasing will be decreasing in investor sophistication whereas it is otherwise increasing.

Keywords: Extrapolation, Earnings Management, Price Efficiency, Financial Reporting, Bounded Rationality

JEL Classification: D82, D91, G14, G41, M41

Suggested Citation

Lambertsen, Nikolaj Niebuhr, Manipulation and Obfuscation of the Financial Report (May 27, 2020). Available at SSRN: or

Nikolaj Niebuhr Lambertsen (Contact Author)

Aarhus University - Department of Economics and Business Economics ( email )

Fuglesangs Allé 4
Aarhus V, 8210

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