The long-term consequences of disclosure complexity on a firm’s information environment: evidence that disclosure complexity reduces information asymmetry

Abstract

Motivated by recent regulatory discussion on the effects of disclosure length and complexity on investors—which mirrors disagreement in the academic literature on how disclosure “complexity” affects market participants— I investigate the long-term effects of complex disclosures on a firm’s information environment. I find that firms with complex disclosures are characterized by a relatively better information environment than firms with less complex disclosures. While prior research has primarily focused on investor reactions to the filing of a complex disclosure, such as to the initial filing of a firm’s 10-K, I examine the investor response to future firm disclosures. I show that firms that issue complex 10-Ks have lower levels of investor disagreement and information asymmetry at future earnings announcement dates. My study has two important implications. First, my results suggest, contrary to regulatory concerns, that disclosure complexity leads to lower levels of information asymmetry, which results in a more level playing field for investors. Second, I contribute to the academic debate on the effects of disclosure complexity by demonstrating that the time horizon used in the evaluation process is critical in assessing the overall consequences of complexity for a firm’s information environment.