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Measuring Firm Complexity

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  • Loughran, Tim
  • McDonald, Bill

Abstract

In business research, firm size is both ubiquitous and readily measured. Complexity, another firm-related construct, is also relevant, but difficult to measure and not well-defined. As a result, complexity is less frequently incorporated in empirical designs. We argue that most extant measures of complexity are one-dimensional, have limited availability, and/or are frequently misspecified. Using both machine learning and an application-specific lexicon, we develop a text solution that uses widely available data and provides an omnibus measure of complexity. Our proposed measure, used in tandem with 10-K file size, provides a useful proxy that dominates traditional measures.

Suggested Citation

  • Loughran, Tim & McDonald, Bill, 2024. "Measuring Firm Complexity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 59(6), pages 2487-2514, September.
    • Handle: RePEc:cup:jfinqa:v:59:y:2024:i:6:p:2487-2514_1
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