Coordinated Inattention and Disclosure Complexity

Hong Qu (), Jared Williams (), Ran Zhao () and Anthony Kwasnica ()
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Hong Qu: Department of Accounting and Kennesaw State University - Michael J. Coles College of Business, Kennesaw, Georgia 30144
Jared Williams: Department of Finance, Muma College of Business, University of South Florida, Tampa, Florida 33629
Ran Zhao: Guanghua School of Management, Peking University, Beijing 100871, China
Anthony Kwasnica: Department of Economics, Florida State University, Tallahassee, Florida 32306

Management Science, 2025, vol. 71, issue 2, 1581-1599

Abstract: We examine a beauty contest game with an option to analyze an additional disclosure. We analytically prove that in some scenarios, coordination incentives cause sophisticated players who can comprehend disclosures to choose not to analyze them to match unsophisticated players’ actions, a phenomenon we call “coordinated inattention.” Laboratory experiments provide support for the coordinated inattention mechanism: Coordination incentives reduce sophisticated subjects’ propensity to analyze disclosures, especially when they believe others are unlikely to comprehend them. We further find that psychological biases help reduce coordinated inattention. Subjects are overconfident, sophisticated subjects overestimate others’ ability to comprehend disclosures, and both biases are associated with a higher tendency to analyze disclosures. Our analysis suggests that unsophisticated decision makers’ inability to comprehend complex disclosures has a negative spillover effect by reducing sophisticated decision makers’ attention to disclosures. Our results highlight the importance of the recent efforts of the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) to make disclosures easier to comprehend.

Keywords: information acquisition; coordination game; complexity; investor sophistication; false consensus effect; overconfidence (search for similar items in EconPapers)
Date: 2025
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