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Managers’ choice of disclosure complexity

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  • Bertomeu, Jeremy

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.

Suggested Citation

  • Bertomeu, Jeremy, 2023. "Managers’ choice of disclosure complexity," Journal of Accounting and Economics, Elsevier, vol. 76(2).
    • Handle: RePEc:eee:jaecon:v:76:y:2023:i:2:s0165410123000617
    DOI: 10.1016/j.jacceco.2023.101637
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    References listed on IDEAS

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