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Managers' Choice of Disclosure Complexity

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  • Jeremy Bertomeu

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.

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  • Jeremy Bertomeu, 2023. "Managers' Choice of Disclosure Complexity," Papers 2308.09789, arXiv.org.
    • Handle: RePEc:arx:papers:2308.09789
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    File URL: http://arxiv.org/pdf/2308.09789
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