Strategic complexity in disclosure

Cyrus Aghamolla and Kevin Smith

Journal of Accounting and Economics, 2023, vol. 76, issue 2

Abstract: Extensive evidence suggests that managers strategically choose the complexity of their descriptive disclosures. However, their motives in doing so appear mixed, as complex disclosures are used to obfuscate in some cases and to provide information in others. Building on these observations, we first identify a novel stylized fact: disclosure complexity is non-monotonic in firm performance. We develop a model of disclosure complexity that incorporates the dual roles of complexity and can explain this stylized fact. In the model, a manager discloses to investors of heterogeneous sophistication and can adjust the complexity of the disclosure to either provide more precise information or to obfuscate. When the firm's investor base is largely unsophisticated, the manager issues a complex disclosure only upon observing negative news. In contrast, when the firm's investor base is more sophisticated, the manager issues a complex disclosure upon observing either highly positive or negative news. As a result, the market may react more positively to complex information releases than to simple releases, complex disclosures generate heightened return volatility, and firms with more inherently complex information are more likely to use their discretion to simplify their disclosures.

Keywords: Financial reporting complexity; Disclosure; Complexity; Obfuscation; Sophisticated investors; MD&A (search for similar items in EconPapers)
JEL-codes: C72 D82 D83 G14 M41 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:76:y:2023:i:2:s0165410123000599

DOI: 10.1016/j.jacceco.2023.101635

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