Managers' Choice of Disclosure Complexity
Abstract
Aghamolla and Smith (2023) make a significant contribution to enhancing our understanding of how managers choose financial reporting complexity. I outline the key assumptions and implications of the theory, and discuss two empirical implications: (1) a U-shaped relationship between complexity and returns, and (2) a negative association between complexity and investor sophistication. However, the robust equilibrium also implies a counterfactual positive market response to complexity. I develop a simplified approach in which simple disclosures indicate positive surprises, and show that this implies greater investor skepticism toward complexity and a positive association between investor sophistication and complexity. More work is needed to understand complexity as an interaction of reporting and economic transactions, rather than solely as a reporting phenomenon.
Cite
@article{arxiv.2308.09789,
title = {Managers' Choice of Disclosure Complexity},
author = {Jeremy Bertomeu},
journal= {arXiv preprint arXiv:2308.09789},
year = {2023}
}