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Comovement, financial reporting complexity, and information markets: Evidence from the effect of changes in 10-Q lengths on internet search volumes and peer correlations

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  • Filzen, Joshua J.
  • Schutte, Maria Gabriela

Abstract

We investigate the effect of financial reporting complexity on stock comovement. We hypothesize that investors deal with complexity increases by acquiring low cost information. This information is typically informative not just about the firm of interest but also about other firms with similar fundamentals, which generates excess comovement. We find that increases in 10-Q word counts, a complexity proxy, are consistently followed by increases in 1) internet searches about the firm and 2) R2s from regressions between the firm’s returns and its peers’. On a large scale, complexity-induced comovement might hinder investors’ ability to discriminate across stocks and identify business innovators.

Suggested Citation

  • Filzen, Joshua J. & Schutte, Maria Gabriela, 2017. "Comovement, financial reporting complexity, and information markets: Evidence from the effect of changes in 10-Q lengths on internet search volumes and peer correlations," The North American Journal of Economics and Finance, Elsevier, vol. 39(C), pages 19-37.
    • Handle: RePEc:eee:ecofin:v:39:y:2017:i:c:p:19-37
    DOI: 10.1016/j.najef.2016.10.001
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    3. Taicir Mezghani & Mouna Boujelbène Abbes, 2023. "Forecast the Role of GCC Financial Stress on Oil Market and GCC Financial Markets Using Convolutional Neural Networks," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 30(3), pages 505-530, September.
    4. Ding, Rong & Zhou, Hang & Li, Yifan, 2020. "Social media, financial reporting opacity, and return comovement: Evidence from Seeking Alpha," Journal of Financial Markets, Elsevier, vol. 50(C).
    5. Bhuiyan, Rubaiyat Ahsan & Rahman, Maya Puspa & Saiti, Buerhan & Ghani, Gairuzazmi Bin Mat, 2019. "Does the Malaysian Sovereign sukuk market offer portfolio diversification opportunities for global fixed-income investors? Evidence from wavelet coherence and multivariate-GARCH analyses," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 675-687.

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    More about this item

    Keywords

    Financial reporting complexity; Comovement; Information processing costs; Complementarities; Information acquisition;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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