Guay 2016 Guiding Through The Fog Financial Statement Complexity

Journal of Accounting and Economics 62 (2016) 234–269
Contents lists available at ScienceDirect
Journal of Accounting and Economics

journal homepage: www.elsevier.com/locate/jae
Guiding through the Fog: Financial statement complexity

and voluntary disclosure$
Wayne Guay, Delphine Samuels, Daniel Taylor n
The Wharton School, University of Pennsylvania, USA
a r t i c l e in f o abstract
Available online 19 September 2016 A growing literature documents that complex financial statements negatively affect the
JEL classification: information environment. In this paper, we examine whether managers use voluntary
D82 disclosure to mitigate these negative effects. Employing cross-sectional and within-firm
D83 designs, we find a robust positive relation between financial statement complexity and
G14 voluntary disclosure. This relation is stronger when liquidity decreases around the filing of
M41 the financial statements, is stronger when firms have more outside monitors, and is
M45 weaker when firms have poor performance and greater earnings management. We also
examine the relation between financial statement complexity and voluntary disclosure
Keywords: using two quasi-natural experiments. Employing a generalized difference-in-differences
Financial statement complexity
design, we find firms affected by the adoption of complex accounting standards (e.g., SFAS
Voluntary disclosure
133 and SFAS 157) increase their voluntary disclosure to a greater extent than unaffected
Information environment
firms. Collectively, these findings suggest managers use voluntary disclosure to mitigate
the negative effects of complex financial statements on the information environment.
& 2016 Elsevier B.V. All rights reserved.
“I am raising the question here and internally at the SEC as to whether investors need, and are optimally served, by the
detailed and lengthy disclosures about all of the topics that companies currently provide in the reports they are required to
prepare and file with us. […] In some cases, lengthy and complex disclosure may indeed be a direct result of the
Commission’s rules.” – SEC Chair Mary Jo White, speech to the National Association of Corporate Directors,
October 15, 2013.
1. Introduction
Financial statements provide a structured medium for firms to disclose accounting information and to supply discussion
and analysis that explains financial results. However, the growing complexity of accounting rules and explanatory language
surrounding firms’ financial statements has led to concerns about the effectiveness of these disclosures in communicating
information to shareholders. Many scholars and practitioners argue that the increasing complexity of these disclosures
☆
We thank The Wharton School for financial support. Additionally, we thank an anonymous referee, Brad Badertscher, Mary Barth, Brian Bushee,
Kimball Chapman, Luzi Hail, Michelle Hanlon (co-editor), Mirko Heinle, Bradford Hepfer, Bob Holthausen, John Kepler, Caleb Rawson, Katherine Schipper,
Cathy Schrand, David Tsui, Andy Van Buskirk, Ro Verrecchia, Joanna Wu (co-editor), Donny Zhao, Travis Dyer, Mark Lang, and Lorien Stice-Lawrence
(discussants), and seminar participants at the 2015 AAA annual meeting, the 2015 Journal of Accounting and Economics Conference, the 2015 Penn State
Accounting Research Conference, the 2015 University of Colorado Summer Accounting Research Conference, the University of Rochester, the University of
Southern California, and The Wharton School for helpful comments.
n
Corresponding author. Tel.: þ1 2158986769.
E-mail addresses: guay@wharton.upenn.edu (W. Guay), dels@wharton.upenn.edu (D. Samuels), dtayl@wharton.upenn.edu (D. Taylor).
http://dx.doi.org/10.1016/j.jacceco.2016.09.001
0165-4101/& 2016 Elsevier B.V. All rights reserved.
W. Guay et al. / Journal of Accounting and Economics 62 (2016) 234–269 235
makes it difficult for management to bring any given item to investors' attention.1 Consistent with these arguments, a
growing literature documents that complex financial statements negatively affect the information environment. For
example, experimental and empirical evidence suggests that both professional and non-professional investors fail to
internalize information in complex financial statements, and that more complex financial statements reduce price efficiency
and increase uncertainty.2
With respect to managing their information environment, firms have at their disposal a variety of disclosure mediums
beyond financial statements that can be used to achieve an optimal information environment (e.g., management forecasts,
8-K filings, press releases). While the literature noted above documents the potential negative effects of complex financial
statements, it does not explore whether managers use alternative disclosure channels to mitigate these effects.
Theoretically, the relation between financial statement complexity and voluntary disclosure depends on how the
complexity arises. On the one hand, complex financial statements might reflect an intentional choice by managers to
obfuscate and hide information from investors, for example poor performance (e.g., Li, 2008). In this case, managers choose
to accept the negative effects of financial statement complexity (as their personal benefits from a low quality information
environment exceed the costs) and are not expected to provide investors with supplemental information outside of the
required financial report. In this case, we expect no relation–or perhaps even a negative relation–between financial
statement complexity and voluntary disclosure.
On the other hand, complex financial statements might reflect the complexity of the firm's business transactions and
associated reporting standards. In this case, the negative effects of financial statement complexity do not reflect an intentional
choice by managers. Consequently, if the complexity of the financial statements causes the quality of the information envir-
onment to decline, economic theory suggests managers will use other disclosure channels to improve the information
environment.3 For example, when firms engage in complex transactions or apply complex reporting standards, investors may
have difficulty understanding the content of the 10-K. Observing these difficulties (or perhaps in some cases anticipating them),
managers may provide additional disclosures to help investors understand the performance implications of these transactions. In
this case, we expect a positive relation between financial statement complexity and voluntary disclosure.
We examine the relation between financial statement complexity and voluntary disclosure using multiple measures of
these constructs and using three distinct sets of tests. Following an extensive prior literature, we measure financial state-
ment complexity using the readability and length of the firm's 10-K filing (e.g., Li, 2008), and we measure voluntary dis-
closure using the frequency of management forecasts (e.g., Balakrishnan et al., 2014a). To ensure our inferences are not
unique to a specific voluntary disclosure channel, in subsequent analyses we confirm that our results are robust to using 8-K
filings and firm-initiated press releases as alternative measures of voluntary disclosure.
In the first set of tests, we examine the relation between financial statement complexity and voluntary disclosure using
both cross-sectional and within-firm designs. A key advantage of using a within-firm design is that it helps alleviate con-
cerns that our measures of financial statement complexity capture omitted, firm-specific characteristics (e.g., industry
practices) and controls for persistence in both independent and dependent variables. We find (1) a positive association
between financial statement complexity and voluntary disclosure over periods ranging from one month to twelve months
after the filing of the 10-K, (2) within a firm, increases in financial statement complexity are associated with increases in
voluntary disclosure, and (3) financial statement complexity of a given 10-K has a greater association with voluntary dis-
closure after the 10-K filing than voluntary disclosure before the 10-K filing.
In our second set of tests, we examine cross-sectional variation in the relation between financial statement complexity
and voluntary disclosure. In particular, we examine how this relation varies with: (1) the change in liquidity at the time the
10-K is filed, (2) the intensity of external monitoring, and (3) firm performance and earnings management. Such tests are
helpful because, although our main tests examine voluntary disclosure locally around 10-K filings, one might still harbor a
concern that a correlated omitted variable might independently affect both complexity of the financial statements and the
demand for voluntary disclosure. Finding consistent evidence across multiple predictions makes it less likely that our
collective results are attributable to alternative explanations or specific research design choices.
We find that the relation between financial statement complexity and voluntary disclosure is stronger when there is a
greater reduction in liquidity around the filing of the 10-K, and when firms have more outside monitors. We also find that
the relation between financial statement complexity and voluntary disclosure is weaker when firms have poor performance
and greater earnings management. Collectively, these findings suggest that the positive relation between financial state-
ment complexity and voluntary disclosure is strongest (weakest) in firms where managers have greater (lesser) incentives
to mitigate the informational problems created by complex financial statements.
In our third set of tests, we use two quasi-natural experiments to examine the relation between financial statement com-
plexity and voluntary disclosure. Specifically, we use a generalized difference-in-differences design to examine changes in
voluntary disclosure around the adoption of SFAS 133 (Accounting for Derivatives) and the adoption of SFAS 157 (Fair Value
1
See for example Bloomfield (2002), Hirshleifer and Teoh (2003), Miller (2010), KPMG (2011), and Monga and Chasan (2015).
2
For empirical evidence see You and Zhang (2009), Miller (2010), Lehavy et al. (2011), Lee (2012), Bonsall and Miller (2013), Callen et al. (2013),
Lawrence (2013), Loughran and McDonald (2014), Bozanic and Thevenot (2015), and Lang and Stice-Lawrence (2015). For a review of experimental evi-
dence see Libby et al. (2002).
3
See for example Proposition 3 of Jung and Kwon (1988), Corollary 2 of Verrecchia (1990), and related discussions in Einhorn (2005), and Bagnoli and
Watts (2007).
236 W. Guay et al. / Journal of Accounting and Economics 62 (2016) 234–269
Measurements). The advantages of this analysis are two-fold. First, because these are two of the more complex accounting
standards (KPMG, 2011), this analysis allows us to validate that our text-based measures of financial statement complexity
reflect, at least in part, the complexity of the underlying accounting rules. Second, we can use the adoption of these accounting
standards to identify the effect of changes in reporting standards on financial statement complexity, and in turn voluntary
disclosure.
We find that the adoptions of both SFAS 133 and SFAS 157 are associated with an increase in financial statement
complexity for affected firms, and in turn, an increase in the firms’ voluntary disclosure. These findings suggest that
managers give specific consideration to the informational problems created by complex accounting standards, and help
alleviate concerns that a correlated omitted variable might independently effect both complexity of the financial statements
and the demand for voluntary disclosure (e.g., a merger might simultaneously increase the complexity of the 10-K filing and
create a demand for voluntary disclosure independent of any effect on the 10-K). To explain our results, an omitted variable
would need to be positively correlated with financial statement complexity, with voluntary disclosure, with the timing of
both rule changes, and differentially affect adopting and non-adopting firms.
Finally, we conduct an extensive battery of sensitivity tests designed to rule out alternative explanations including time
trends in financial statement complexity and voluntary disclosure. We make two points. First, a common time trend in
financial statement complexity and voluntary disclosure is predicted by the disclosure theory that underlies our analysis–as
mandatory disclosure becomes increasingly complex over time (e.g., Li, 2008) the information processing costs associated
with parsing mandatory disclosure increase and managers increasingly rely on voluntary disclosure to communicate
information. Second, a strength of our research design is that it exploits both cross-sectional and temporal variation in
complexity. In particular, a common time trend in financial statement complexity and voluntary disclosure cannot explain
the results of our cross-sectional tests–tests that rely on variation in liquidity, monitoring, firm performance and earnings
management across firms–or the results from our two quasi-natural experiments where the difference-in-differences
design that we employ removes any common time trend. In Section 5.6, we provide an extensive discussion of these issues.
Collectively, our results suggest a more nuanced view of how complex financial statements affect the mosaic of public
information about the firm–while prior research documents that complex financial statements negatively affect the
information environment, our results suggest that some firms attempt to mitigate these effects using voluntary disclosure.
Our study contributes to the literature that examines how managers use different disclosure mediums to manage the
information environment, and our findings are consistent with predictions from extant theory that managers trade-off
various disclosure mediums in attempting to achieve an optimal information environment. Consistent with mandatory and
voluntary disclosure serving as substitutes, we find that lower information accessibility in mandatory disclosure (in the
form of complexity) is associated with more information being released through voluntary disclosure.
The remainder of the paper proceeds as follows. Section 2 reviews the related theoretical and empirical literature on
financial statement complexity and the relation between mandatory and voluntary disclosure. Section 3 describes the
research design and measurement choices. Section 4 describes the sample. Section 5 presents the results and discusses our
robustness tests. Section 6 makes suggestions for future research. Section 7 provides concluding remarks.
2. Literature review
2.1. Theory literature
More complex financial statements require more time and effort to extract relevant information, which makes them more
costly to parse by investors (e.g., Bloomfield, 2002). Regulators have long voiced concerns about excessively lengthy and complex
financial statements. In 1969, the SEC published the “Wheat Report,” which noted that the average investor was unable to readily
understand firms’ prospectuses, and recommended that companies avoid unnecessarily complex, lengthy or verbose writing.
More recently, the SEC adopted the “plain English” rule in an effort to increase disclosure readability (SEC Rule 421(d)).4 Despite
these efforts, concerns remain that financial statement complexity adversely affects both unsophisticated and sophisticated
investors. For example, a recent study by KPMG (2011) finds that the complexity of financial statements and associated infor-
mation processing costs have continued to grow–primarily due to changes in disclosure requirements related to fair value
accounting, derivatives, and hedging (see also, Chasan and Rubenfeld, 2015; Monga and Chasan, 2015).
It is well known that an increase in information processing costs leads to a decrease in the average precision of investors’
beliefs about future cash flow (e.g., Grossman and Stiglitz, 1980; Kim and Verrecchia, 1991). In early theory papers on
voluntary disclosure, Jung and Kwon (1988) and Verrecchia (1990) show that a decrease in the average precision of
investors’ beliefs about future cash flow—an increase in uncertainty about future cash flow–causes an increase in voluntary
disclosure.
4
Additional initiatives to reduce financial statement complexity include the FASB's “Disclosure Framework Project” in 2009 and “Simplification
Initiative” in 2014, the SEC's “Disclosure Effectiveness Initiative” in 2013, the IASB's “Disclosure Initiative” in 2013, and the UK Financial Reporting Council's
“Cutting Clutter” initiative in 2011.
Taylor and Verrecchia (2015) discuss how uncertainty about future cash flow is driven by the sum of two forces–the real
volatility of future cash flow (fundamental uncertainty) and common knowledge about that cash flow (information
uncertainty). Either an increase in fundamental uncertainty or an increase in information uncertainty works to increase total
uncertainty about future cash flow. Managers may not be able to reduce fundamental uncertainty using voluntary disclosure
(i.e., reduce the real volatility of cash flow), but may be able to reduce information uncertainty using voluntary disclosure
(i.e., increase common knowledge).5 This motivates our focus on whether managers use voluntary disclosure to alleviate
“informational problems” associated with complex financial statements.
We make three additional points regarding the theoretical relation between financial statement complexity and
voluntary disclosure. First, although economic theory predicts managers use voluntary disclosure to alleviate the infor-
mational problems associated with complex financial statements, the theory provides little guidance on the content or
medium of the voluntary disclosure. For example, suppose that in the year of adoption, SFAS 133 created some uncertainty
about the hedging aspects of a firm's derivatives positions. Further, assume that observing this confusion, management
decides to provide voluntary disclosure to assist investors in sorting out the implications of SFAS 133 for future cash flow.
One possibility might be to issue a press release to provide additional detail on the derivatives positions. Another possibility,
however, might be to issue a management forecast of earnings, thereby helping investors synthesize the information that
was provided in the 10-K (i.e., effectively showing investors how the derivatives disclosures map into future earnings). This
example illustrates that our empirical predictions do not require that the additional voluntary disclosure be verbiage that is
directly tied to the source of increased uncertainty.
Second, the theory provides little guidance on the timing of any additional voluntary disclosure. When managers
anticipate informational problems, they could conceivably pre-empt these problems, either by altering the content of the
financial statements, or by increasing voluntary disclosure prior to filing the financial statements. The fact that prior
research finds complex financial statements negatively affect the information environment suggests managers are unable
(or unwilling) to mitigate these effects by altering the financial statements themselves.6 Moreover, theory would suggest
firms with persistently high levels of financial statement complexity–for example firms that operate in industries with more
complex reporting standards (e.g., banks affected by SFAS 157)–will provide persistently high levels of voluntary disclosure
on an ongoing basis. If financial statement complexity is persistent, we would expect financial statement complexity
measured in a given 10-K to be associated with voluntary disclosure both before and after the 10-K filing. Thus, while the
extant theory models predict an association between the level of financial statement complexity and the level of voluntary
disclosure, they do not make predictions about the timing of the voluntary disclosure relative to the 10-K filing. We
therefore tabulate our results over several windows both before and after the 10-K filing.
Third, the theoretical predictions apply to financial statement complexity–and information processing costs more
broadly–regardless of whether financial statement complexity stems from the complexity of the firm's business transactions
(“business complexity”) or the complexity of associated reporting standards (“reporting complexity”), and regardless of
whether it is “normal” or “abnormal” (see Fig. 1). For example, Li (2008) suggests complexity of financial statements has
been increasing over time, and Dyer et al. (2015) suggest this trend is primarily due to changes in regulation. If this is the
case, theory would suggest a corresponding increase in voluntary disclosure over time–as the information processing costs
associated with mandatory disclosure increase, managers increasingly compensate with voluntary disclosure.
Business
Complexity
Financial
Voluntary
Statement
Disclosure
Complexity
Reporting
Complexity
Fig. 1. The relation between financial statement complexity and voluntary disclosure. This figure illustrates the theoretical predictions concerning the
complexity of the firm’s business transactions (“business complexity”), the complexity of the firm’s accounting (“reporting complexity”), the complexity of
financial statements, and voluntary disclosure. If financial statement complexity causes the quality of the information environment to decline, regardless of
the source, or whether it is “normal” or “abnormal,” economic theory suggests managers will issue voluntary disclosure to improve the information
environment.
5
For example, several papers suggest that firms with more volatile fundamentals are less likely to provide voluntary disclosure (e.g., Waymire, 1985;
Chen et al., 2011).
6
This is perhaps not surprising given that predicting precisely where and when investors will struggle to understand a given set of financial state-
ments is likely to prove difficult. Academic authors will appreciate the challenge in conveying complex information. Even when authors are using their best
efforts to be transparent, it may nevertheless be difficult to anticipate where a reader will struggle with the material.
2.2. Empirical literature
Consistent with concerns in regulatory and practitioner circles that an increase in financial statement complexity
negatively affects the information environment, empirical research shows that complex financial statements are associated
with lower trading volume and ownership among retail investors (e.g., Miller, 2010; Lawrence, 2013), increased analyst
forecast dispersion and reduced analyst forecast accuracy (e.g., Lehavy et al., 2011; Bozanic and Thevenot, 2015), dis-
agreement among credit rating agencies (e.g., Bonsall and Miller, 2013), reductions in the extent to which prices impound
information (e.g., You and Zhang, 2009; Lee, 2012; Callen et al., 2013), and increased idiosyncratic volatility (e.g., Loughran
and McDonald, 2014). While the extant literature documents the potential negative effects of financial statement com-
plexity, it does not examine whether managers use alternative disclosure channels to mitigate these effects.
One view of complex financial statements is that they reflect an information-based agency problem. While the theo-
retical models discussed earlier are predicated on the notion that managers seek to maximize firm value, this need not be
the case. Managers may intentionally choose to add (unnecessary) complexity to financial statements if the personal
benefits from doing so exceed the costs. For example, Li (2008) interprets the negative relation between firm performance
and financial statement complexity as evidence that managers intentionally increase financial statement complexity to
obfuscate poor performance. If high levels of financial statement complexity reflect an intentional choice to obfuscate
information, then it seems unlikely that these managers would use alternative disclosure channels to increase the quality of
the information environment.
An alternative view of complex financial statements is that they reflect the complexity of the firm's business transactions and
associated reporting and disclosure rules. That is, managers attempt to avoid unnecessary complexity when preparing financial
statements, but complex transactions, complex reporting and mandatory disclosure rules (e.g., consolidation accounting, hedge
accounting, or accounting for financial assets) may necessitate complex financial statements. In this case, as suggested by extant
theory, voluntary disclosure may be a supplemental medium that allows managers to communicate information to investors, and
thereby mitigate the negative effects of complex financial statements on the information environment.
To be clear, the notion that financial statement complexity might not be the result of intentional obfuscation is not new. Other
work that makes this point includes Bloomfield (2008) and Bushee et al. (2015). Bloomfield (2008) suggests an alternative
explanation for the negative relation between firm performance and financial statement complexity documented in Li (2008) is
that poor performance requires managers to provide more detailed explanations. Bushee et al. (2015) contrast the language used
by managers on conference calls with the language used by analysts on conference calls in an attempt to identify when managers
on the call are obfuscating. Consistent with the notion that complexity is not always obfuscation, one of the key findings in
Bushee et al. (2015) is that when analysts ask complex questions, managers provide more complex responses, and these
responses are informative and not obfuscatory (i.e., they reduce information asymmetry).
The distinguishing feature of our study is that we examine how financial statement complexity relates to voluntary
disclosure, where the sign of this relation is predicted to depend on whether or not the complexity is intentional. While
prior literature has examined financial statement complexity or voluntary disclosure in isolation, it has generally not sought
to relate the two. In this regard, our paper is related to Lehavy et al. (2011) who examine how analysts respond to the
informational problems created by complex financial statements. In the same vein, we examine how managers respond to
the informational problems created by complex financial statements.
Our paper is also related to prior literature that examines the relation between market-based measures of uncertainty
and management forecasts. For example, Coller and Yohn (1997) find a larger run up in bid-ask spread prior to earnings
announcements that include a management forecast, and Billings et al. (2015) find similar results for implied volatility.
Market-based measures of uncertainty are inherently forward-looking; prices are set based on investors’ expectations of
future events. Consequently, a larger increase in spread and volatility prior to an earnings announcement that includes a
management forecast could represent either managers issuing the forecast in response to an increase in uncertainty (e.g.,
Coller and Yohn, 1997; Billings et al., 2015) or the market anticipating the additional disclosure (e.g., Kim and Verrecchia,
1991; McNichols and Trueman, 1994; Rogers et al., 2009; Iselin and Van Buskirk, 2015). This interpretation issue motivates
our focus on financial statement complexity rather than market-based measures of information uncertainty, and motivates
our two quasi-natural experiments that examine how firms alter their voluntary disclosure in response to the adoption of
complex accounting standards. Similar to Balakrishnan et al. (2014a) who find that managers respond to an exogenous
reduction in analyst coverage by increasing management forecasts, our results suggest managers respond to an exogenous
increase in financial statement complexity by increasing voluntary disclosure.
Another important point of departure from these papers is that their hypotheses and tests are specific to management
forecasts. In contrast, our hypotheses apply to voluntary disclosure more broadly (as a theoretical construct). To illustrate
this point, we predict and find similar relations between financial statement complexity and other measures of voluntary
disclosure (e.g., 8-K filings and firm-initiated press releases). These findings show our results are not unique to a specific
voluntary disclosure channel, but apply generally.
Several related studies examine the interplay between firms' mandatory and voluntary disclosure. For the most part,
these studies focus on measures of earnings quality and document a positive relation between earnings quality and the
incidence, frequency, and accuracy of voluntary disclosure (e.g., Lennox and Park, 2006; Francis et al., 2008; Gong et al.,
2009). One exception is Ball et al. (2012), who find that more “verifiable” mandatory disclosures, as measured by higher
audit fees, are positively associated with the frequency and quality of management forecasts. In contrast to these studies, we
show that voluntary disclosure is sometimes negatively related to the quality of mandatory disclosure. That is, lower
information accessibility in mandatory disclosure (in the form of complexity) is associated with more information being
released through voluntary disclosure. This is consistent with mandatory and voluntary disclosure serving as substitutes.
3. Research design
3.1. Financial statement complexity and voluntary disclosure
We examine the relation between financial statement complexity and voluntary disclosure by estimating regressions of
the form:
VolDisct þ 1 ¼ φ0 þ φ1 FS_Complexityt þ θ Controlst þ εt ; ð1Þ
where FS_Complexity is a measure of financial statement complexity, VolDisc is a measure of voluntary disclosure, and
Controls is a vector of control variables.
Similar to prior research, our primary measure of voluntary disclosure, VolDisc, is the number of management forecasts
issued over the twelve months following the filing of the 10-K (see Hirst et al., 2008 for a review). To ensure that our results
are not specific to a particular window of disclosure, we also measure the number of forecasts over the 90, 60, and 30 days
after the filing of the 10-K, VolDisc_90, VolDisc_60, VolDisc_30, respectively. These narrower windows allow us to sharpen
identification that the disclosure serves as follow up to the 10-K, but reduce the power of our tests.7 Also, conditional on
observing a forecast, we measure the number of days between a firm's 10-K filing and the first management forecast
thereafter. We define Immediacy as the number of days between a firm's 10-K filing and the first management forecast
thereafter, multiplied by negative one so that it is increasing in timeliness. For example, an immediacy of –118 implies the
first forecast occurred 118 days after the 10-K was filed.
In subsequent analyses, we assess the robustness of our results to using 8-K filings and firm-initiated press releases as
alternative measures of voluntary disclosure. Finding similar results for these alternative measures helps alleviate concerns
that our results are driven by specific measurement choices related to management forecasts, and emphasizes that our
predictions and inferences are not specific to management forecasts (one channel of voluntary disclosure), but rather apply
to voluntary disclosure more generally. Collectively, these measures capture management's use of voluntary disclosure to
supply investors with additional information after the 10-K filing, as well as how quickly such information is forthcoming.
Following an extensive prior literature, we measure financial statement complexity using the readability (ReadIndex) and
length (Length) of the firm's 10-K. While much of the prior literature in accounting uses the Fog index to measure read-
ability, to ensure that our results are not specific to any single measure of readability, and to mitigate the influence of
measurement error in any given measure, we construct a readability index that combines several established measures of
readability. Specifically, ReadIndex is the first principal component of the following measures of readability: Flesch-Kincaid
readability, LIX readability, RIX readability, Gunning Fog readability, ARI readability, and SMOG readability. Each of these
measures is effectively a function of word complexity and sentence length, and higher values correspond to less readable
text. Appendix A provides detailed definitions of these variables, presents the results from our principal component analysis,
and reports the correlations among the six measures of readability and ReadIndex. The analysis shows that only a single
factor has an eigenvalue greater than one, that this factor (ReadIndex) explains 94% of the variation in these measures, and
that all measures of readability are highly correlated with each other and with ReadIndex.8
We measure length of the firm's 10-K, Length, as the natural logarithm of the number of words. Because the costs of
processing longer documents are presumably higher, longer documents can be more difficult to read. Consistent with the
prior literature, we use the natural logarithm rather than the raw number of words to reduce the impact of extreme values
and skewness in the number of words across firms.9
In all of our regression specifications, we include the following variables as controls. Size is the natural logarithm of
market value of equity as of the fiscal year-end. ROA is the industry-year adjusted return on assets, measured as income
before extraordinary items scaled by total assets. Loss is an indicator variable equal to one if net income is negative and zero
otherwise. Leverage is long-term debt plus short-term debt scaled by total assets. MTB is the market value of equity plus
book value of liabilities divided by book value of assets. SpecialItems is special items scaled by total assets. Returns is the buy
and hold return over the twelve months prior to the 10-K filing date. σReturns is the standard deviation of monthly returns
7
We focus on the number of forecasts because this measure can be calculated for all firms, and captures all forms of management guidance (e.g., EPS,
cash flows, sales, etc.). An earlier version of the paper reported similar inferences using an indicator variable for whether the firm provides a management
forecast. However, such a variable results in considerable loss of information; if a firm is already providing a forecast, by construction, the measure of
voluntary disclosure cannot increase.
8
See Jones and Shoemaker (1994) and Moffitt and Burns (2009) for reviews of studies using each of these measures of readability. An earlier version
reported similar inferences using the Fog index. Our measures of readability are from the WRDS SEC Analytics Suite and are unaffected by the technical
issues related to the construction of the Fog index documented in Appendix B of Bushee et al. (2015).
9
In untabulated analyses, we find that results are robust to using electronic file size of the 10-K filing to measure financial statement complexity (e.g.,
Loughran and McDonald, 2014).
over the twelve months prior to the filing date. Note that all independent variables are measured prior to our measures of
voluntary disclosure (the dependent variable).
Throughout all of our analyses, we base inferences on standard errors clustered by firm and filing date, and estimate linear
regressions using the decile ranks of the independent variables scaled to range from 0 to 1. We use the decile ranks of each
independent variable to ensure that all independent variables are of similar scale. As a result, each coefficient measures the
change in the respective measure of voluntary disclosure when moving from the bottom decile to the top decile of the respective
independent variable, ceteris paribus. This, in turn, allows us to meaningfully compare the relative economic significance of each
variable. The ranked specification has the added advantage of being robust to both outliers and nonlinearities.
The theoretical arguments for why financial statement complexity engenders subsequent voluntary disclosure predict
not only that variation in complexity across firms is related to voluntary disclosure, but also that, within the firm, time-
series variation in complexity should be associated with time-series variation in voluntary disclosure. To determine whether
within-firm variation in financial statement complexity explains within-firm variation in voluntary disclosure, we estimate
an augmented version of Eq. (1) that includes firm fixed effects. This research design eliminates the cross-sectional variation
in financial statement complexity and voluntary disclosure, and relies on within-firm time-series variation to identify the
coefficient on FS_Complexity. If the relation between financial statement complexity and voluntary disclosure is driven
exclusively by cross-sectional differences in firm characteristics, then holding the firm constant, we expect to find no
evidence of a relation between financial statement complexity and voluntary disclosure.10
3.2. Cross-sectional variation in the relation between financial statement complexity and voluntary disclosure
In this section, we describe the research design used to test our cross-sectional predictions. We first examine how the
relation between financial statement complexity and voluntary disclosure varies with the change in liquidity at the time the
10-K is filed. More complex financial statements require greater information processing which reduces liquidity, and extant
research suggests that managers use voluntary disclosure to achieve a target level of liquidity (e.g., see Figure 10 of Graham
et al., 2005). Consequently, we predict that the greater the reduction in liquidity when the financial statements are filed, the
more likely managers are to provide voluntary disclosure subsequent to filing complex financial statements.
To test this prediction, we interact FS_Complexity in Eq. (1) with two measures of the changes in illiquidity around the
filing date of the 10-K, and predict positive coefficients on the interaction terms. We measure the change in illiquidity using
both the Amihud (2002) measure of illiquidity:
jRt j
Illiquidityt ¼ 106 ð2Þ
DVolumet
where Rt is the daily return and DVolumet is the daily dollar volume (in millions), and the bid-ask spread:
Askt Bidt
Spreadt ¼ 100 ð3Þ
pricet
where Askt (Bidt) is the quoted closing ask (bid) on day t, and pricet is the closing price on day t from CRSP.
We calculate the Amihud (2002) measure of illiquidity and the bid-ask spread at the daily level and then calculate the
change around the filing date, ΔIlliquidity and ΔSpread, as the difference between the average value on the day of and after
the filing (t ¼ 0, 1) and the average value over the window beginning fifty days prior to the filing and ending five days prior
to the filing (t ¼ –50, …, –5). To compute ΔIlliquidity and ΔSpread, we require non-missing data on the daily CRSP file for at
least 20 days prior to, the day of, and the day after the 10-K filing date.
Our second set of cross-sectional tests examines how the relation between financial statement complexity and voluntary
disclosure varies with scrutiny from external monitors. On the one hand, managers under a high degree of scrutiny from
external monitors may have stronger incentives to mitigate the negative informational effects of complex financial state-
ments and maintain the quality of the information environment (e.g., Ajinkya et al., 2005; Armstrong et al., 2010a). On the
other hand, in the absence of agency conflicts, a higher level of external monitors might indicate a rich information
environment which could decrease managers’ incentives to provide additional disclosure. To examine whether the relation
between financial statement complexity and voluntary disclosure varies with external monitoring, we interact FS_Com-
plexity in Eq. (1) with two measures of external monitoring. We measure external monitoring using the number of analysts
following the firm as of the filing date of the 10-K (NAnalysts) and the number of institutional investors in the firm as of the
latest calendar quarter-end prior to the 10-K filing date (NInstitutions).11
Our third set of cross-sectional tests examines how the relation between financial statement complexity and voluntary
disclosure varies with firm performance and the level of earnings management. Conditional on either poor firm performance or
earnings management, the benefits of a low quality information environment accrue to the manager (e.g., a reduced likelihood of
termination or reputational damage, inflated stock price, inflated compensation) whereas the costs are borne by shareholders
10
Inferences are also robust to restricting our sample to those firms that have more than one CEO during our sample period and including both firm
and manager fixed effects.
11
Results are robust to using percent of institutional ownership or the number of large blockholders (those with 5% or more ownership) to measure
external monitoring.
(e.g., reduction in liquidity, greater cost of capital). Consequently, we predict that the positive relation between complexity and
voluntary disclosure is weaker when the firm underperforms its industry peers, posts a loss, and has large abnormal accruals. To
test this prediction, we interact FS_Complexity in Eq. (1) with two measures of firm performance, ROA and Loss (as previously
defined), and the firm's performance-matched abnormal accruals, AbAcc (e.g., Kothari et al., 2005).12
3.3. Two quasi-natural experiments
In this section, we examine changes in financial statement complexity and voluntary disclosure around the adoption of
SFAS 133 (Accounting for Derivatives) and the adoption of SFAS 157 (Fair Value Measurements) using a generalized
difference-in-differences design. Both rules require extensive disclosures about fair value measurements, which we expect
will increase the complexity of affected firms' financial statements–and if our hypotheses above are correct–will also
increase voluntary disclosure. The advantage of focusing on these two changes in accounting standards are two-fold.
(1) Since these are two of the more complex accounting standards, the analysis allows us to validate that our text-based
measures of financial statement complexity reflect, at least in part, complexity of the underlying accounting and mandatory
disclosure rules. (2) The adoption of these accounting standards allows us to isolate the effect of reporting complexity on
financial statement complexity, and in turn voluntary disclosure. These tests provide direct evidence on whether managers
give specific consideration to the complexity of accounting standards.
Regulators’ motives for the passage of fair value accounting standards such as SFAS 133 and SFAS 157 primarily relate to
providing users with an understanding of the value of complex assets and the sources of information used to estimate these
values (see FASB, Appendix C of SFAS 133 and Appendix C of SFAS 157).13 However, anecdotal evidence and academic studies
suggest that, to this day, the complexity associated with these standards impairs market participants’ ability to understand
and price this information (e.g., Riedl and Serafeim, 2011; Campbell, 2015). For example, a recent KPMG survey seeking to
identify sources of disclosure overload and complexity concludes that “fair value, derivatives and hedging are the most
significant sources of disclosure complexity under specific GAAP requirements” (KPMG, 2011, page 18).14
For each change in accounting standards, we identify the firms affected by the change (“Treatment”) and a propensity score
matched sample of firms unaffected by the change (“Control”). Specifically, we use propensity score matching to form one-to-one
matched-pairs by estimating a propensity score in the year prior to the respective change in accounting standards as a function
of the control variables in Eq. (1) and the average values of our three measures of voluntary disclosure (management forecasts, 8-
Ks and firm-initiated press releases) over the three years prior to the change in accounting regulation. We then match each
treatment firm to a corresponding control firm, with replacement, using the matching algorithm described in Armstrong et al.
(2010b). We repeat this procedure for each rule change, resulting in separate treatment and control groups for SFAS 133 and SFAS
157. Tests for covariate balance between the two groups appear in Table B2 in Appendix B.
The advantage of using a matched sample of firms as a control group is two-fold. First, if observations with certain char-
acteristics (e.g., size) are more likely to be treated and to have a differential trend in voluntary disclosure, controlling for these
characteristics mitigates concerns that the treatment is non-random. Second, using treatment and control groups that are similar
with respect to such characteristics can improve precision and better isolate the treatment effect (Roberts and Whited, 2013).
Nevertheless, in untabulated analyses, we find our results are not sensitive to this research design choice; inferences are robust to
using the entire sample of unaffected firms as the control group.
We employ a generalized difference-in-differences design. Specifically, for each rule change, we estimate the following
regression:
VolDisct þ 1 ¼ φ0 þ φ1 Post t Treated þ f þ δ þ θ Controlst þ εt ; ð4Þ
where Post is an indicator variable equal to one for fiscal years after the rule change became effective, and zero otherwise,
Treated is an indicator variable equal to one for firms affected by the respective rule change, and zero otherwise, f and δ are
vectors of firm and year fixed effects, respectively, and all other variables are as previously defined. We estimate Eq. (4) over
a period of six years around each regulatory change (i.e., three years prior to and three years after the change). For SFAS 133,
12
Firms are matched to a respective industry-year peer on Compustat by minimizing the absolute difference in ROA. In untabulated analyses, we
examine two additional measures of earnings management: (1) size-age-growth matched accruals (e.g., Armstrong et al., 2016) and (2) an indicator for
whether the firm meet-or-beat analyst earnings targets by $0.01/share or less. While we find inferences are robust to (1), we find the interaction between
financial statement complexity and (2) is statistically insignificant at conventional levels. It is unclear how to interpret this finding in light of the fact that
analyst forecast accuracy is itself affected by both complexity and voluntary disclosure (see discussion in Appendix C).
13
SFAS 133, “Accounting for derivative instruments and hedging activities”, was adopted for fiscal periods beginning after June 15, 2000, and mandates
that a firm record changes in the fair value of its cash flow hedges in accumulated other comprehensive income (AOCI), a component of shareholders’
equity. As such, unrealized changes in fair value appear on the balance sheet but do not appear on the income statement until they are realized. SFAS 157,
“Fair value measurements”, effective for fiscal periods beginning after November 15, 2007, provides a framework for the measurement of financial assets
and liabilities at fair value. Specifically, it distinguishes between three levels of inputs used to derive fair value estimates: level 1 inputs consist of
observable quoted prices in active markets for identical assets or liabilities; level 2 inputs consist of observable sources other than quoted prices; and level
3 inputs consist of unobservable, firm-supplied sources.
14
To provide an anecdote, in 2004 the SEC directed Fannie Mae to restate its earnings by $9 billion of losses on derivatives due to improper application
of SFAS 133. According to a case study by Risk Limited Corporation, Fannie Mae failed to fully understand the SFAS 133 rules, which “illustrates the
complexity and effort required for ongoing FAS 133 compliance” (p. 16). See case study at: www.energyrisk.org/deutsch/fas-133-fannie-mae.ppt. Note that our
tests rely only on the notion that the adoptions of SFAS 133 and 157 increased information processing costs within three years of the respective adoptions.
Treated firms are those reporting unrealized gains and losses on derivatives in accumulated other comprehensive income
(e.g., Campbell, 2015), and the pre-period (post-period) refers to three fiscal periods beginning before (after) June 15, 2000.
For SFAS 157, Treated firms are those reporting level 1, level 2 or level 3 assets or liabilities (e.g., Riedl and Serafeim, 2011),
and the pre-period (post-period) refers to three fiscal periods beginning before (after) November 15, 2007.
The distinguishing feature of the “generalized” difference-in-differences design is that it includes both firm and year fixed
effects, which controls for any fixed differences between affected and unaffected firms (firm fixed effects absorb the Treated main
effect) and any time trends (year fixed effects absorb the Post main effect). Thus, the key strength of this design is that it controls
for any common time trends and any contemporaneous regulatory changes that affect all firms (e.g., Reg FD)–common shocks
either prior to or after the rule change are differenced out. The coefficient on the interaction term, Post*Treated, represents the
average treatment effect; see Hansen (2007) and Angrist and Pischke (2009) for details on this design.
4. Sample and descriptive statistics
4.1. Sample construction
We construct our sample using data from Compustat, CRSP, I/B/E/S, Thomson-Reuters database of 13-F filings, and the
WRDS SEC Analytics Suite. The sample begins in 1995, when management earnings forecasts first become available in the
I/B/E/S Guidance database, and ends in 2012. To be included in the sample, a firm must have a 10-K filing on EDGAR between
1995 and 2012, sufficient financial statement data on Compustat to calculate our control variables, and monthly stock
returns over the twelve months prior to the 10-K filing on CRSP. The resulting sample consists of 72,366 firm-years.
In two of our cross-sectional tests, we impose additional sample requirements. In the cross-sectional tests that involve
market-based measures of changes in illiquidity (ΔIlliquidity and ΔSpread), presented in Table 4, the sample is reduced to
69,066 observations due to data requirements to calculate daily bid/ask spreads. In tests that involve earnings management,
presented in Table 6, the sample is reduced to 59,068 firm-years due to data requirements to estimate performance-
matched abnormal accruals (AbAcc).
4.2. Descriptive statistics
Table 1, Panel A presents descriptive statistics for our sample. Firms provide, on average, 2.62 (0.59) forecasts over the
twelve months (three months) following the 10-K, and for those firms providing a forecast, the first forecast occurs on
average 108.52 days after the 10-K filing. The average 10-K in our sample has a ReadIndex of –0.01 and Length of 10.25, (or
33,896 words). Table 1, Panel B presents correlations among the variables used in our analysis, with Spearman (Pearson)
correlations above (below) the diagonal. The Spearman (Pearson) correlation between our two measures of financial
statement complexity is 0.47 (0.49), and the correlation between our measures of voluntary disclosure over the various
windows ranges between 0.33 (Spearman correlation between VolDisc and VolDisc_30) and 0.89 (Pearson correlation
between VolDisc and VolDisc_90). Notably, all measures of voluntary disclosure are positively correlated with all measures of
financial statement complexity.
Table 2 presents the average values of our measures of voluntary disclosure by quintile of financial statement complexity, and
the difference between extreme quintiles. Table 2 shows that the lowest quintile of ReadIndex (Length) has on average 1.27 (0.61)
forecasts over the twelve months following the 10-K filing, while the highest quintile has on average 3.40 (4.17) forecasts, a
difference of 2.13 (3.56) forecasts. Similarly, the first forecast for the lowest quintile of ReadIndex (Length) comes on average
123.86 (145.78) days after the filing of the 10-K, while the first forecast for the highest quintile comes on average 101.05 (96.27)
days after the filing of the 10-K, a difference of 22.81 (49.51) days. All differences are positive and statistically significant (two-
tailed p-values o0.01). Although effectively a univariate analysis and subject to the standard limitations, the results in Table 2 are
consistent with a positive relation between financial statement complexity and voluntary disclosure.
5. Results
5.1. Financial statement complexity and voluntary disclosure
Table 3 presents results from estimating Eq. (1) using our primary measure of voluntary disclosure, VolDisc. Columns
(1) and (2) present results measuring financial statement complexity using ReadIndex and columns (3) and (4) present
results measuring financial statement complexity using Length. Results from estimating pooled regressions appear in col-
umns (1) and (3). The coefficients on our two measures of financial statement complexity are positive and both statistically
and economically significant. A firm in the top decile of ReadIndex issues about one additional management forecast over the
twelve months following the 10-K relative to a firm in the bottom decile of ReadIndex, ceteris paribus (φ1 ¼ 0.98, t-stat ¼
7.40). Similarly, a firm in the top decile of Length issues about three additional management forecasts over the twelve
months following the 10-K filing relative to a firm in the bottom decile of Length, ceteris paribus (φ1 ¼ 2.90, t-stat ¼ 21.32).
By comparison, the average firm issues 2.6 management forecasts.
Table 1
Descriptive statistics.
Panel A presents descriptive statistics for the variables used in our analysis. Panel B presents correlations between the variables used in our analysis. Spearman (Pearson) correlations appear above (below) the
diagonal. VolDisc is the number of management forecasts issued over the twelve months following the 10-K filing date, VolDisc_90, VolDisc_60, and VolDisc_30 are the number of management forecasts issued over
the 90, 60, and 30 days following the 10-K filing date, respectively. Immediacy is the number of days between the 10-K filing date and the firm's first management forecast issued thereafter, multiplied by –1.
ReadIndex is the first principal component of the following six measures of readability: Flesch-Kincaid readability, Gunning Fog readability index, RIX readability, ARI readability, SMOG readability, and LIX
readability. See Appendix A for details. Length is the natural logarithm of the number of words in the firm's 10-K. Size is the natural logarithm of market value of equity, measured at the fiscal year-end. ROA is the
industry-year adjusted return on assets, measured as income before extraordinary items scaled by total assets. Loss is an indicator variable equal to one if net income is negative, and zero otherwise. Leverage is long
term debt plus short term debt, scaled by total assets. MTB is the market value of equity plus book value of liabilities divided by book value of assets, measured at the fiscal year-end. SpecialItems is special items
scaled by total assets. Returns is the buy and hold return over the twelve months prior to the 10-K filing date. σReturns is the standard deviation of monthly returns over the twelve months prior to the 10-K filing
W. Guay et al. / Journal of Accounting and Economics 62 (2016) 234–269

date. ΔIlliquidity is the average value of the Amihud (2002) measure of illiquidity on day t ¼ 0 and day t ¼ 1 relative to the 10-K filing date, less the average value from t ¼ –5…–50, multiplied by 106. ΔSpread is the
average value of the bid-ask spread on day t ¼ 0 and day t ¼ 1 relative to the 10-K filing date, less the average value from t ¼ –5…–50, multiplied by 100, where bid-ask spread is calculated as (ask–bid)/price using
data on closing prices and quotes from CRSP. NAnalysts is the number of analysts with one-year ahead earnings forecasts as of the 10-K filing date. NInstitutions is the number of institutional investors as of the 10-K
filing date. AbAcc is performance-matched abnormal accruals. Sample of 72,366 firm-year observations from 1995 to 2012.
Panel A. Distribution of variables
Variable Observations Mean Std 25th Median 75th
Measures of voluntary disclosure

VolDisc 72,366 2.62 5.35 0.00 0.00 2.00
VolDisc_90 72,366 0.59 1.37 0.00 0.00 0.00
VolDisc_60 72,366 0.37 0.98 0.00 0.00 0.00
VolDisc_30 72,366 0.07 0.34 0.00 0.00 0.00
Immediacy 26,509 –108.52 96.94 –153.00 –63.00 –44.00
Measures of financial statement complexity

ReadIndex 72,366 –0.01 0.92 –0.59 –0.05 0.52
Length 72,366 10.25 0.59 9.89 10.28 10.64
Additional variables
Size 72,366 5.64 1.98 4.21 5.55 6.97
ROA 72,366 0.00 0.23 –0.02 0.02 0.09
Leverage 72,366 0.22 0.22 0.02 0.16 0.35
MTB 72,366 1.94 1.79 1.03 1.29 2.05
SpecialItems 72,366 –0.02 0.07 –0.01 0.00 0.00
Loss 72,366 0.32 0.47 0.00 0.00 1.00
Returns 72,366 0.14 0.67 –0.25 0.05 0.36
σReturns 72,366 0.15 0.10 0.08 0.12 0.18
ΔIlliquidity 69,066 –0.11 2.93 –0.04 0.00 0.00
ΔSpread 69,066 0.02 1.27 –0.26 –0.02 0.16
NAnalysts 72,366 4.61 5.80 1.00 2.00 6.00
NInstitutions 72,366 97.97 132.53 16.00 51.00 124.00
AbAcc 59,068 0.49 0.50 0.00 0.00 1.00
243
244
Panel B. Correlation matrix
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19) (20)
(1) 0.81 0.66 0.33 0.51 0.14 0.27 0.40 0.30 0.01 0.18 –0.13 –0.11 0.05 –0.04 0.13 0.04 0.47 0.48 –0.05
(2) 0.89 0.81 0.43 0.75 0.14 0.27 0.35 0.26 0.01 0.14 –0.11 –0.10 0.04 –0.07 0.11 0.04 0.39 0.41 –0.05
(3) 0.70 0.80 0.52 0.82 0.09 0.19 0.24 0.22 –0.01 0.12 –0.09 –0.06 0.03 –0.04 0.09 0.03 0.29 0.30 –0.04
(4) 0.34 0.45 0.49 0.60 0.04 0.07 0.14 0.10 0.01 0.06 –0.06 –0.04 0.00 0.00 0.05 0.02 0.18 0.17 –0.02
(5) 0.45 0.58 0.52 0.36 0.06 0.14 0.11 0.13 –0.02 0.02 –0.05 –0.04 –0.01 –0.07 0.05 0.03 0.11 0.16 –0.02
(6) 0.12 0.12 0.08 0.04 0.07 0.47 0.22 0.07 0.02 0.04 –0.09 0.06 –0.02 –0.01 0.08 0.02 0.19 0.24 –0.03
(7) 0.25 0.23 0.16 0.07 0.18 0.49 0.36 0.09 0.15 –0.05 –0.11 0.08 –0.03 –0.06 0.13 0.05 0.26 0.41 –0.03
(8) 0.34 0.30 0.21 0.15 0.15 0.22 0.35 0.12 0.11 0.33 –0.03 –0.33 0.25 –0.34 0.29 0.07 0.69 0.92 –0.08
(9) 0.15 0.13 0.11 0.06 0.08 0.06 0.12 0.05 –0.14 0.26 –0.06 –0.01 0.02 0.14 0.05 0.01 0.13 0.18 0.00
(10) –0.01 –0.01 –0.03 –0.01 0.00 0.04 0.15 0.05 –0.04 –0.21 –0.04 –0.02 –0.02 –0.09 0.03 0.01 0.02 0.11 0.01
(11) 0.04 0.02 0.02 0.01 –0.05 0.01 –0.07 0.16 0.04 –0.17 –0.02 0.01 0.22 0.13 0.13 0.04 0.26 0.24 –0.04

(12) 0.01 0.01 0.00 –0.01 0.01 –0.04 –0.04 0.12 0.00 –0.03 –0.03 –0.29 0.15 –0.16 –0.04 –0.01 –0.08 –0.08 0.10
(13) –0.10 –0.09 –0.06 –0.04 –0.06 0.05 0.08 –0.33 0.04 0.05 0.12 –0.34 –0.29 0.48 –0.03 0.01 –0.18 –0.25 –0.01
(14) 0.04 0.02 0.02 0.00 –0.03 –0.02 –0.03 0.16 –0.01 –0.04 0.23 0.14 –0.16 –0.18 0.02 –0.03 0.07 0.17 –0.02
(15) –0.10 –0.09 –0.06 –0.01 –0.09 –0.03 –0.03 –0.33 0.02 –0.02 0.21 –0.23 0.46 0.08 –0.02 –0.01 –0.12 –0.26 0.01
(16) 0.02 0.02 0.01 0.01 0.01 0.01 0.02 0.06 0.00 0.00 0.02 0.00 –0.01 0.00 0.00 0.20 0.23 0.29 –0.02
(17) –0.01 0.00 0.00 0.00 0.00 0.00 0.01 –0.01 0.00 0.01 0.01 –0.02 0.04 –0.04 0.03 0.20 0.05 0.06 0.00
(18) 0.34 0.31 0.23 0.17 0.11 0.16 0.23 0.70 0.04 0.01 0.09 0.04 –0.18 0.03 –0.17 0.03 –0.01 0.71 –0.08
(19) 0.36 0.32 0.22 0.18 0.15 0.18 0.32 0.80 0.07 0.06 0.05 0.06 –0.23 0.06 –0.24 0.03 –0.01 0.73 –0.07
(20) –0.05 –0.05 –0.04 –0.02 –0.02 –0.03 –0.03 –0.07 0.00 0.01 –0.02 0.11 –0.01 –0.01 0.01 –0.01 0.01 –0.07 –0.05
Legend: (1) VolDisc, (2) VolDisc_90, (3) VolDisc_60, (4) VolDisc_30, (5) Immediacy, (6) ReadIndex, (7) Length, (8) Size, (9) ROA, (10) Leverage, (11) MTB, (12) SpecialItems, (13) Loss, (14) Returns, (15) σReturns, (16)
ΔIlliquidity, (17) ΔSpread, (18) NAnalysts, (19) NInstitutions, (20) AbAcc
Table 2
Distribution of voluntary disclosure by quintile of financial statement complexity.
This table presents the average value for each measure of voluntary disclosure by quintile of financial statement complexity. Panel A presents results
measuring financial statement complexity using ReadIndex. Panel B presents results measuring financial statement complexity using Length. p-values (two-
tailed) appear in brackets and test for a difference in the respective measure of voluntary disclosure between extreme quintiles. All variables are as defined
in Table 1.
Panel A. Quintiles of ReadIndex
ReadIndex quintile
Variable Q1 Q2 Q3 Q4 Q5 Diff Q5–Q1 Diff p-value
VolDisc 1.27 2.26 2.86 3.30 3.40 2.13 [ o 0.01]

VolDisc_90 0.27 0.49 0.64 0.76 0.78 0.51 [ o 0.01]
VolDisc_60 0.18 0.33 0.42 0.47 0.44 0.26 [ o 0.01]
VolDisc_30 0.05 0.07 0.08 0.09 0.09 0.04 [ o 0.01]
Immediacy –123.86 –111.99 –104.72 –100.98 –101.05 22.81 [ o 0.01]
Panel B. Quintiles of Length
Length quintile
Variable Q1 Q2 Q3 Q4 Q5 Diff Q5–Q1 Diff p–value
VolDisc 0.61 1.30 2.71 4.30 4.17 3.56 [o 0.01]

VolDisc_90 0.12 0.28 0.60 0.99 0.96 0.84 [o 0.01]
VolDisc_60 0.09 0.21 0.43 0.61 0.50 0.41 [o 0.01]
VolDisc_30 0.04 0.06 0.08 0.09 0.11 0.07 [o 0.01]
Immediacy –145.78 –112.38 –95.75 –92.43 –96.27 49.51 [o 0.01]
Table 3
Financial statement complexity and voluntary disclosure.
This table presents results from estimating the association between financial statement complexity (FS_Complexity) and voluntary disclosure over the
twelve months following the filing of the 10-K (VolDisc). Columns (1) and (2) present results measuring financial statement complexity using ReadIndex,
and columns (3) and (4) present results measuring financial statement complexity using Length. All variables are as defined in Table 1. Independent
variables are transformed into decile ranks and scaled to range from 0 to 1. t-statistics appear in parentheses and are based on standard errors clustered by
firm and filing date. nnn, nn, and n denote statistical significance at the 0.01, 0.05, and 0.10 levels (two-tail), respectively.
Dependent variable: VolDisc
FS_Complexity ¼ ReadIndex FS_Complexity ¼ Length
Variable (1) (2) (3) (4)
FS_Complexity 0.98nnn 1.51nnn 2.90nnn 4.32nnn

(7.40) (9.63) (21.32) (22.63)
Control variables
Size 4.62nnn 6.77nnn 3.47nnn 4.92nnn
(20.30) (17.10) (16.33) (15.20)
ROA 3.82nnn 2.30nnn 3.56nnn 1.77nnn

(24.19) (15.20) (24.11) (14.04)
Leverage –0.05 0.69nnn –0.27nn 0.33nn

(–0.42) (4.13) (–2.20) (2.12)
MTB 0.35nn –2.33nnn 0.91nnn –1.47nnn

(2.21) (–10.78) (6.06) (–8.16)
SpecialItems –1.73nnn –0.59nnn –1.70nnn –0.37nnn

(–15.38) (–7.49) (–15.31) (–5.16)
Loss –0.48nnn –0.20nnn –0.84nnn –0.46nnn

(–5.18) (–2.72) (–9.81) (–6.66)
Returns –0.29nn 0.07 –0.23nn 0.12

(–2.08) (0.59) (–1.98) (1.21)
σReturns –0.31n –1.30nnn –0.32nn –1.30nnn

(–1.90) (–6.98) (–2.19) (–8.40)
Firm Effects No Yes No Yes

Observations 72,366 72,366 72,366 72,366
R2 (%) 18.4 61.2 20.4 63.1
Columns (2) and (4) present results after including firm fixed effects in the regression specification. The coefficients on our
two measures of financial statement complexity remain highly statistically and economically significant (t-stats ¼ 9.63 and
22.63, respectively) with economic magnitudes that are somewhat greater than in columns (1) and (3). This is an important
finding for our analysis because it indicates that within a firm, increases in financial statement complexity are positively
associated with increases in voluntary disclosure. These results are robust to: (a) estimating our regression specifications
separately for firms that provide, and firms that do not provide, a management forecast over the 12 months prior to the filing
of the 10-K, (b) differentiating between earnings and non-earnings management forecasts, and (c) differentiating between
forecasts that do and do not occur contemporaneously with the following earnings announcement (i.e., “bundled” and
“unbundled” forecasts). Results of these robustness tests are presented in Table B1 of Appendix B.
5.2. Cross-sectional variation in the relation between financial statement complexity and voluntary disclosure
5.2.1. Changes in illiquidity around the filing of the 10-K

Table 4 presents results from estimating a model similar to Table 3, except that we include measures of the change in
illiquidity around the 10-K filing date (ΔIlliquidity and ΔSpread) and interact these measures with our measures of financial
statement complexity. Columns (1) through (4) of Table 4 present results using ReadIndex to measure financial statement
complexity, and columns (5) through (8) present results using Length to measure financial statement complexity. We
estimate regressions that interact each illiquidity measure separately, followed by specifications that include both illiquidity
variables in the same regression specification, followed by specifications that include firm fixed effects. Finding consistent
evidence across multiple specifications where interactions are included separately and simultaneously suggests our results
are not influenced by multicollinearity.
Consistent with our predictions, across all specifications, we find that the coefficients on the interaction between our measures
of financial statement complexity and changes in illiquidity are positive and statistically significant at conventional levels. These
findings indicate that managers appear to give specific consideration to the effect of the 10-K filing on liquidity when deciding to
provide voluntary disclosure.15
Table 4
Cross-sectional tests: Changes in illiquidity around the filing of the financial statements.
This table presents results from examining whether the relation between financial statement complexity and voluntary disclosure varies with the change
in illiquidity around the 10-K filing. Our model follows the specifications in Table 3, except that we interact our measures of financial statement complexity
with our measures of the change in illiquidity around the 10-K filing (ΔIlliquidity and ΔSpread). All variables are as defined in Table 1. Independent variables
are transformed into decile ranks and scaled to range from 0 to 1. For parsimony, we do not tabulate coefficients on control variables. t-statistics appear in
parentheses and are based on standard errors clustered by firm and filing date. nnn, nn, and n denote statistical significance at the 0.01, 0.05, and 0.10 levels
(two-tail), respectively.
Variable (1) (2) (3) (4) (5) (6) (7) (8)
FS_Complexity x ΔIlliquidity 0.85nnn . 0.78nnn 0.73nnn 1.58nnn . 1.49nnn 1.34nnn

(4.79) . (4.42) (4.97) (7.01) . (6.62) (7.28)
FS_Complexity x ΔSpread . 0.50nnn 0.34nnn 0.24n . 0.79nnn 0.50nnn 0.30nn

. (3.70) (2.62) (1.90) . (4.97) (3.20) (2.07)
Main effects
FS_Complexity 0.59nnn 0.76nnn 0.45nnn 1.06nnn 2.15nnn 2.55nnn 1.95nnn 3.54nnn
(5.05) (5.76) (3.76) (6.59) (16.43) (18.16) (13.94) (19.08)
ΔIlliquidity –0.27nnn . –0.28nnn –0.32nnn –0.59nnn . –0.59nnn –0.57nnn
(–3.44) . (–3.63) (–4.48) (–7.53) . (–7.50) (–7.83)
ΔSpread . 0.01 0.07 0.11 . –0.13nn –0.02 0.04
. (0.20) (1.08) (1.56) . (–2.42) (–0.32) (0.60)
Controls Yes Yes Yes Yes Yes Yes Yes Yes

Firm Effects No No No Yes No No No Yes
Observations 69,066 69,066 69,066 69,066 69,066 69,066 69,066 69,066
R2 (%) 18.4 18.4 18.4 61.8 20.4 20.4 20.4 63.7
15
We note that the main effect on ΔIlliquidity is often negative and significant across specifications (similarly, the main effect on ΔSpread is negative
and significant in one specification). We urge caution in interpreting this result. Liquidity and bid-ask spread reflect both fundamental uncertainty driven
by volatility of firms’ cash flows and information uncertainty driven by the information environment (Taylor and Verrecchia, 2015). Consequently, if firms
with the least complex financial statements experience a large change in illiquidity around their 10-K filing, that change is more likely attributable to
Table 5
Cross-sectional tests: External monitors.
This table presents results from examining whether the relation between financial statement complexity (FS_Complexity) and voluntary disclosure
(VolDisc) varies with the intensity of external monitoring. Our model follows the specifications in Table 3, except that we interact our measures of financial
statement complexity with our measures of external monitoring intensity (NAnalysts and NInstitutions). All variables are as defined in Table 1. Independent
variables are transformed into decile ranks and scaled to range from 0 to 1. For parsimony, we do not tabulate coefficients on control variables. t-statistics
appear in parentheses and are based on standard errors clustered by firm and filing date. nnn, nn, and n denote statistical significance at the 0.01, 0.05, and
0.10 levels (two-tail), respectively.
Variable (1) (2) (3) (4) (5) (6) (7) (8)
FS_Complexity x NAnalysts 3.40nnn . 2.61nnn 2.47nnn 6.68nnn . 5.98nnn 6.04nnn

(8.44) . (5.78) (5.75) (15.29) . (13.99) (12.72)
FS_Complexity x NInstitutions . 3.29nnn 1.61nnn 1.85nnn . 5.67nnn 1.62nnn 3.61nnn

. (8.44) (3.90) (4.36) . (13.20) (3.94) (7.43)
Main effects
FS_Complexity –0.87nnn –0.80nnn –1.37nnn –1.03nnn –0.66nnn –0.45nnn –1.47nnn –1.66nnn
(–6.10) (–6.20) (–8.85) (–5.55) (–3.75) (–2.60) (–7.38) (–7.07)
NAnalysts 2.70nnn . 2.28nnn –0.71nn 0.87nnn . 0.48nn –2.19nnn

(10.00) . (9.04) (–2.57) (3.25) . (2.28) (–7.46)
NInstitutions . 5.84nnn 5.25nnn 5.36nnn . 3.95nnn 4.67nnn 2.62nnn

. (17.50) (16.88) (14.80) . (11.46) (14.93) (7.16)

Firm Effects No No No Yes No No No Yes
Observations 72,366 72,366 72,366 72,366 72,366 72,366 72,366 72,366
R2 (%) 22.1 21.9 24.1 62.5 25.1 23.9 26.8 64.7
5.2.2. External monitors

Table 5 presents results from including our measures of external monitoring (NAnalysts and NInstitutions), and inter-
acting these measures with our measures of financial statement complexity. Consistent with the prediction that managers
under a high degree of scrutiny from external monitors have stronger incentives to mitigate the negative informational
effects of complex financial statements, across all specifications, we find that the relation between financial statement
complexity and voluntary disclosure is significantly stronger when the firm has a greater number of analysts and institu-
tional investors.
Notably, our results also suggest that the sign of the relation between financial statement complexity and voluntary
disclosure depends on the presence of external monitors (i.e., the main effect of FS_Complexity is negative and significant
across all specifications). That is, while firms in the top decile of analyst coverage or number of institutional investors
provide more voluntary disclosure after filing complex financial statements, firms in either the bottom decile of analyst
coverage (firms that have zero analyst coverage) or in the bottom decile of institutional investor coverage (firms that have
less than 7 institutional investors) provide less voluntary disclosure after filing complex financial statements. This is con-
sistent with the notion that scrutiny from external monitors disciplines managers’ disclosure decisions, and in the absence
of that scrutiny, managers can more easily engage in self-interested activity at the expense of shareholders (e.g.,
obfuscation).
5.2.3. Firm performance and earnings management

Table 6 presents results from including our measures of firm performance (ROA and Loss) and earnings management (AbAcc)
in the model, and interacting these measures with our measures of financial statement complexity. Consistent with our pre-
dictions, across all specifications, we find: (i) that the coefficient on the interaction between financial statement complexity and
ROA is positive and statistically significant, (ii) that the coefficient on the interaction between financial statement complexity and
Loss is negative and statistically significant, and (iii) that the coefficient on the interaction between financial statement com-
plexity and AbAcc is negative and statistically significant. These findings are consistent with the notion that, conditional on either
poor firm performance or earnings management, the benefits of a low quality information environment accrue to the manager,
whereas the costs are borne by shareholders.
(footnote continued)
revisions in fundamental uncertainty (as opposed to revisions in information uncertainty), and prior literature suggests that firms with more fundamental
uncertainty are less likely to disclose (e.g., Waymire, 1985; Chen et al., 2011).
Table 6
Cross-sectional tests: Firm performance and earning management.
This table presents results from examining whether the relation between financial statement complexity and voluntary disclosure varies with firm
performance and earnings management. Our model follows the specifications in Table 3, except that we interact our measures of financial statement
complexity with our measures of firm performance and earnings management (ROA, Loss, and AbAcc). All variables are as defined in Table 1. Independent
variables are transformed into decile ranks and scaled to range from 0 to 1. For parsimony we do not tabulate coefficients on control variables. t-statistics
appear in parentheses and are based on standard errors clustered by firm and filing date. nnn, nn, and n denote statistical significance at the 0.01, 0.05, and
0.10 levels (two-tail), respectively.
Variable (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
FS_Complexity x ROA 4.17nnn . . 3.94nnn 2.40nnn 4.31nnn . . 3.85nnn 3.07nnn

(10.66) . . (10.24) (6.95) (9.16) . . (8.49) (7.52)
FS_Complexity x Loss . –1.64nnn . –1.40nnn –0.63nnn . –3.09nnn . –2.89nnn –1.80nnn

. (–8.04) . (–6.85) (–3.56) . (–14.31) . (–13.67) (–9.04)
FS_Complexity x AbAcc . . –1.20nnn –1.25nnn –0.53nnn . . –2.08nnn –2.17nnn –0.92nnn

. . (–4.57) (–4.79) (–2.60) . . (–7.74) (–8.11) (–4.29)
Main effects
FS_Complexity –0.93nnn 1.83nnn 1.88nnn 0.29 1.02nnn 1.28nnn 4.49nnn 4.57nnn 3.51nnn 4.53nnn
(–4.82) (9.34) (8.17) (1.09) (3.78) (5.45) (23.13) (19.29) (11.62) (13.86)
ROA 1.35nnn 3.53nnn 3.52nnn 1.48nnn 1.09nnn 0.72nnn 3.15nnn 3.03nnn 1.08nnn –0.04
(5.97) (20.21) (20.09) (6.56) (5.08) (3.15) (19.45) (19.04) (4.80) (–0.20)
Loss –0.63nnn 0.22n –0.61nnn 0.07 0.04 –1.14nnn 0.50nnn –1.07nnn 0.32nnn 0.36nnn
(–6.15) (1.85) (–5.96) (0.64) (0.40) (–12.51) (4.83) (–11.29) (3.29) (3.32)
AbAcc . . 0.21n 0.25nn 0.42nnn . . 0.60nnn 0.61nnn 0.53nnn

. . (1.73) (2.07) (3.64) . . (6.03) (6.32) (5.04)
Controls Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Firm Effects No No No No Yes No No No No Yes
Observations 59,068 59,068 59,068 59,068 59,068 59,068 59,068 59,068 59,068 59,068
R2 (%) 18.4 18.1 18.0 18.6 61.1 20.8 20.9 20.5 21.5 63.5
Collectively, the results from examining cross-sectional variation in the relation between financial statement complexity
and voluntary disclosure suggest that the positive relation between financial statement complexity and voluntary disclosure
is strongest (weakest) in settings where managers have greater (lesser) incentives to mitigate the informational problems
created by complex financial statements. Testing multiple predictions, and finding robust consistent evidence across these
predictions, makes it less likely that our collective results are attributable to alternative explanations.
5.3. Timing of voluntary disclosure
5.3.1. Timing of voluntary disclosure: pre-emptive voluntary disclosure

To examine whether managers anticipate some of the informational problems associated with complex financial
statements and pre-emptively issue voluntary disclosure, we re-estimate our primary tests using voluntary disclosure
issued in anticipation of the 10-K filing as the dependent variable. We measure voluntary disclosure issued in anticipation of
the 10-K filing as the number of management forecasts issued between the fiscal year-end date and the 10-K filing date,
inclusive (PreVolDisc). If managers anticipate financial statement complexity, and pre-empt complex financial statements
with voluntary disclosure, we predict a positive association between financial statement complexity and voluntary dis-
closure issued prior to the 10-K filing.
We also examine whether the determinants of voluntary disclosure after the filing of a complex 10-K are distinct from
the determinants of voluntary disclosure before the filing of a complex 10-K. If managers do not fully anticipate the
informational problems associated with filing complex financial statements–and hence the determinants differ–we predict
an incremental relation between financial statement complexity (FS_Complexity) and voluntary disclosure subsequent to the
filing (VolDisc) after controlling for voluntary disclosure prior to the filing (PreVolDisc). Otherwise, if the determinants of
voluntary disclosure do not differ before and after the filing of a complex 10-K, then controlling for voluntary disclosure
before the 10-K, we expect to find no evidence of a relation between financial statement complexity and voluntary dis-
closure after the 10-K.
Panel A of Table 7 presents results from estimating Eq. (1) using PreVolDisc as the dependent variable. Panel A shows
positive and statistically significant coefficients on both measures of financial statement complexity. These results suggest
that firms do tend to provide more voluntary disclosure in anticipation of filing complex financial statements. Panel B of
Table 7 presents results from repeating our primary tests in Eq. (1), but including either PreVolDisc or VolDisct-1 (the number
Table 7
Timing of voluntary disclosure: Pre-emptive voluntary disclosure.
This table presents results from estimating the association between financial statement complexity and voluntary disclosure issued prior to the 10–K
filing date. Panel A presents results from repeating the tests in Table 3 after replacing the dependent variable with voluntary disclosure issued between the
fiscal year-end and the 10-K filing date, inclusive (PreVolDisc). Panel B presents results from repeating the tests in Table 3 after including PreVolDisc
(columns (1) and (2)) or the lagged value of VolDisc (columns (3) and (4)) as an additional control variable. We omit firm fixed effects when lagged values
are included as independent variables. All variables are as defined in Table 1. Independent variables are transformed into decile ranks and scaled to range
from 0 to 1. For parsimony we do not tabulate coefficients on control variables. t-statistics appear in parentheses and are based on standard errors clustered
by firm and filing date. nnn, nn, and n denote statistical significance at the 0.01, 0.05, and 0.10 levels (two-tail), respectively.
Panel A. Financial statement complexity and voluntary disclosure prior to the 10-K
Dependent variable: PreVolDisc
Variable (1) (2) (3) (4)

(8.23) (10.26) (20.99) (23.18)
Controls Yes Yes Yes Yes

Observations 72,366 72,366 72,366 72,366
R2 (%) 13.2 50.7 14.9 52.4
Panel B. Controlling for voluntary disclosure prior to the 10-K
Lagged Value: PreVolDisc VolDisct-1
FS_Complexity: ReadIndex Length ReadIndex Length

Variable (1) (2) (3) (4)

(6.07) (14.66) (5.80) (14.84)
Lagged Value 12.63nnn 12.41nnn 13.44nnn 13.24nnn

(45.12) (43.84) (46.54) (45.19)

Firm Effects No No No No
Observations 72,366 72,366 72,366 72,366
R2 (%) 48.2 48.6 50.72 51.04
of management forecasts issued over the twelve months before the 10-K filing) as an additional control variable. Panel B
shows that voluntary disclosure prior to the filing of the 10-K is highly correlated with voluntary disclosure after the filing of
the 10-K. Importantly, all coefficients on our measures of financial statement complexity remain positive and statistically
significant.16 Collectively, the evidence in Table 7 suggests a positive relation between financial statement complexity and
voluntary disclosure immediately prior to the filing, and an incremental association between financial statement complexity
and voluntary disclosure subsequent to the filing.
5.3.2. Timing of voluntary disclosure: Shorter-window analysis

To explore the timing of voluntary disclosure relative to the 10-K filing, we conduct two additional analyses. First, we estimate
Eq. (1) measuring voluntary disclosure over windows that are shorter than twelve months. Specifically, Panel A of Table 8
presents results from estimating Eq. (1) measuring voluntary disclosure using VolDisc_90, VolDisc_60, VolDisc_30 and Immediacy.
Columns (1) through (4) present results measuring financial statement complexity using ReadIndex and columns (5) and
(8) present results measuring financial statement complexity using Length. For parsimony, we present results only for within-
firm specifications. Across all specifications, we find that the relation between financial statement complexity and voluntary
disclosure is statistically significant. These results suggest firms issue both more frequent and more immediate voluntary dis-
closures when their financial statements are more complex.17
16
We exclude firm fixed effects from these specifications, as including both the lag of the dependent variable and firm fixed effects in the same model
yields inconsistent estimates (e.g., Angrist and Pischke, 2009).
17
For parsimony, in Tables 4, 5 and 6, we report results from all our tests of cross-sectional variation using VolDisc as the dependent variable. However,
using VolDisc_90, VolDisc_60, or VolDisc_30 as the dependent variables in these tables yields similar inferences. When Immediacy is defined for both
forecasters and non-forecasters (i.e., set to –365 when the firm does not issue a forecast), our cross-sectional tests on Immediacy also yields similar
inferences. However, when Immediacy is defined only for forecasters (set to missing when the firm does not issue a forecast) the sample shrinks to 26,509
firms (see Table 8, Panel A) and our cross-sectional results are mixed.
Table 8.
Timing of voluntary disclosure: Shorter-window analysis.
This table presents results from estimating the association between financial statement complexity and voluntary disclosure over short windows around
the 10-K filing. Panel A presents results from repeating the tests in Table 3 using forecasts issued 90-, 60-, and 30-days after the filing of the 10-K
(VolDisc_90, VolDisc_60, and VolDisc_30, respectively) and the number of days until the first forecast is provided (Immediacy) as the dependent variable. For
parsimony, we present results only for specifications that include firm fixed effects and do not tabulate coefficients on control variables. All variables are as
defined in Table 1. Independent variables are transformed into decile ranks and scaled to range from 0 to 1. Panel B presents the average daily likelihood
(expressed in percent) of observing a forecast over the [–30, þ30] day window around the 10-K filing, excluding those forecasts falling within one day of an
earnings announcement. Sample of 3,060,488 firm-days. t-statistics appear in parentheses and are based on standard errors clustered by firm and filing
date. p-values (two-tailed) test for differences in average daily likelihood and appear in brackets. nnn, nn, and n denote statistical significance at the 0.01,
0.05, and 0.10 levels (two-tail), respectively.
Panel A. Alternative measurement windows
Dependent 90-day Win- 60-day Win- 30-day Win- Days until first 90-day Win- 60-day Win- 30-day Win- Days until first
variable: dow dow dow forecast dow dow dow forecast
(VolDisc_90) (VolDisc_60) (VolDisc_30) (Immediacy) (VolDisc_90) (VolDisc_60) (VolDisc_30) (Immediacy)
Variable (1) (2) (3) (4) (5) (6) (7) (8)
FS_Complexity 0.41nnn 0.17nnn 0.01n 25.82nnn 1.06nnn 0.57nnn 0.07nnn 78.44nnn

(10.26) (6.25) (1.65) (5.95) (21.27) (19.13) (7.33) (13.22)

Firm Effects Yes Yes Yes Yes Yes Yes Yes Yes
Observations 72,366 72,366 72,366 26,509 72,366 72,366 72,366 26,509
R2 (%) 52.5 42.5 23.5 36.1 54.2 43.5 23.7 37.6
Panel B. Timing of voluntary disclosure around the 10-K filing
Time period relative to 10-K Full Sample ReadIndex Quin- ReadIndex Quin- Diff Q5 – Q1 Length Quintile Length Quintile Diff Q5 – Q1
filing date tile 5 tile 1 5 1
(–30, þ 30) 0.17nnn 0.22nnn 0.12nnn 0.10nnn 0.29nnn 0.09nnn 0.20nnn

(73.24) (36.65) (26.77) [o 0.01] (42.44) (23.80) [o 0.01]
Pre-10K: (–30, –1) 0.14nnn 0.19nnn 0.11nnn 0.08nnn 0.26nnn 0.07nnn 0.19nnn
(46.53) (23.54) (17.90) [o 0.01] (27.75) (14.97) [o 0.01]
Post-10K: ( þ 1, þ 30) 0.20nnn 0.25nnn 0.13nnn 0.12nnn 0.32nnn 0.11nnn 0.21nnn

(54.82) (27.31) (19.40) [o 0.01] (31.15) (17.84) [o 0.01]
Difference: Post – Pre 0.06nnn 0.06nnn 0.02nn 0.04nnn 0.06nnn 0.04nnn 0.02n
[ o 0.01] [ o 0.01] [0.05] [o 0.01] [ o0.01] [ o 0.01] [0.08]
Notably, our results indicate that the strength of the relation between financial statement complexity and voluntary
disclosure is increasing in the length of the window used to measure voluntary disclosure. For example, the coefficient on
financial statement complexity when voluntary disclosure is measured over 90 days is 0.41 for ReadIndex, and 1.06 for
Length (Columns (1) and (5) in Panel A of Table 8), and the coefficient on financial statement complexity when voluntary
disclosure is measured over twelve months is 1.51 for ReadIndex, and 4.32 for Length (Columns (2) and (4) of Table 3)—
approximately four times larger. This finding is consistent with the notion that firms with complex financial statements
commit to providing higher levels of voluntary disclosure on an ongoing basis.
Also, despite that fact that managers do not often issue forecasts over the thirty days following the 10-K filing (average value
of VolDisc_30 is 0.07; see Table 1), we do find results over the 30-day window, albeit substantially weaker than over the longer
windows. As noted in Section 2, one explanation for the results being weaker in the 30-day window is that managers may
require time to sort out the extent to which the 10-K creates informational problems for investors, and the specific portions of
the financial statements that create such problems. That is, managers may need to observe analysts’ and investors’ interpretation
of financial statement information before understanding the source of uncertainty and how to resolve it. Together with the fact
that management rarely issues forecasts within 30 days of the release of the 10-K, the 90-day windows may be the most
convenient time to provide a forecast.18
Second, as an exploratory analysis, we conduct an event study. Specifically, we compare the average daily likelihood of a
forecast over the 30-day window before the 10-K filing to the average daily likelihood of a forecast over the 30-day window
after the 10-K filing (i.e., over the [–30, þ30] window, where day 0 is the 10-K filing date). In order to ensure that variation
in the timing of the earnings announcement does not affect our results, we focus on forecasts not issued within one day of
18
This is consistent with the observation that our results are most pronounced among forecasts bundled with an earnings announcement (see Panel C
of Table B1). In untabulated analysis, we find the Spearman (Pearson) correlation between number of forecasts issued over the 90 days after the 10-K and
the number of forecasts bundled with the subsequent earnings announcement is 0.92 (0.91).
Panel A. Full Sample

0.50%
0.40%
0.30%
Avg. Daily Likelihood

0.20%
0.10%
0.00%
-30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30
-0.10%
-0.20%
-0.30%
-0.40%
-0.50%
Event day
Panel B. Highest and Lowest Quintile of ReadIndex Panel C. Highest and Lowest Quintile of Length
0.50% 0.50%
Quintile 1 Quintile 5 Quintile 1 Quintile 5
0.40% 0.40%
0.30% 0.30%

0.20% 0.20%
0.10% 0.10%
0.00% 0.00%
-30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 -30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30
-0.10% -0.10%
-0.20% -0.20%
-0.30% -0.30%
-0.40% -0.40%
-0.50% -0.50%
Event day Event day
Fig. 2. Timing of voluntary disclosure around the 10-K filing. This figure plots the average daily likelihood of observing a management forecast each day,
expressed in percent, over the [–30, þ 30] day window around the 10-K filing date. All values are in excess of the average daily value over the [–30, þ 30]
window for the full sample of firms. We exclude forecasts made in conjunction with an earnings announcement. Panel A presents results for the full sample
of firm-years, and Panels B and C present results separately for the extreme quintiles of ReadIndex and Length, respectively.
an earnings announcement (i.e., “unbundled” forecasts) We estimate the difference in the average daily likelihood of a
forecast between the pre- and post-periods, and also separately for firms in the top and bottom quintiles of financial
statement complexity.
Fig. 2 plots the average daily likelihood of observing a forecast for each event day, less the average over the [–30, þ30]
window (i.e., 0.17%; see Panel B of Table 8). Panel A shows the likelihood of a forecast in the 30 days after the 10-K filing is
greater than the likelihood of a forecast in the 30 days before the 10-K filing. Panels B and C report the average daily
likelihood of a forecast separately for firms in the extreme quintiles of financial statement complexity. These figures suggest
that not only are firms in the highest quintile of financial statement complexity more likely to issue a forecast both before
and after the 10-K filing (relative to firms in the lowest quintile), but the difference between the extreme quintiles is most
pronounced after the 10-K filing.
Statistical tests of these differences appear in Panel B of Table 8. Consistent with Fig. 2, we find: (i) on average, firms are
more likely to provide a forecast over the 30-day window after the 10-K filing; (ii) before the 10-K filing, firms in the highest
quintile of ReadIndex are more likely to provide a forecast than firms in the lowest quintile; (iii) after the 10-K filing, firms in
the highest quintile of ReadIndex are also more likely to provide a forecast than firms in the lowest quintile; and (iv) the
difference in these differences is statistically significant. Results are similar for Length. These results are consistent with
managers responding to highly complex financial statements by providing voluntary disclosure in a short window following
the 10-K filing, and make it less likely that an omitted variable (such as a merger) explains our results—through a channel
other than financial statement complexity.19
19
In untabulated analysis, we repeat this analysis after selecting a random date between the 10-K filing and the subsequent fiscal year end. We
estimate the difference-in-differences around the random date, and repeat the procedure 1000 times. We find the difference-in-differences estimate
around the 10-K filing is significantly greater than the difference-in-differences estimate for the average random date. This analysis provides additional
comfort that the observed variation in management forecasts is attributable to the 10-K filing event.
5.4. Alternative measures of voluntary disclosure: 8-K filings and firm-initiated press releases
We consider two additional measures of voluntary disclosure: 8-K filings and firm-initiated press releases. Prior research
suggests there is a significant discretionary component to 8-K filing decisions and firm-initiated press releases, and that
managers actively use these disclosures to alter their information environment (e.g., Leuz and Schrand, 2009; Bushee and
Miller, 2012; Shroff et al., 2013; Balakrishnan et al., 2014b). However, these measures can co-mingle both voluntary and
mandatory disclosures. Nevertheless, we examine these additional measures of voluntary disclosure to ensure that our
results are not specific to management forecasts, but rather apply to a broader set of firms’ voluntary disclosures.
Mirroring our earlier management forecast measures of voluntary disclosure, we define VolDisc8K (VolDiscPR) as the
number of 8-Ks (number of firm-initiated press-releases) during the twelve months following the 10-K filing. We obtain 8-K
filings from WRDS SEC Analytics Suite, and we obtain firm-initiated press releases from RavenPack News Analytics. Firm-
initiated press-releases are only available starting in fiscal year 2003, reducing our number of firm-year observations to
36,137.
Panel A of Table 9 presents the average value for our two alternative measures of voluntary disclosure by quintile of financial
statement complexity. Panel A shows a difference of 4.46 (11.03) 8-K filings and 11.72 (16.75) firm-initiated press releases
between the extreme quintiles of ReadIndex (Length). Panels B and C present results from repeating the tests in Table 3, using
VolDisc8K and VolDiscPR as the dependent variable, respectively. Consistent with our earlier results regarding management
forecasts, regardless of specification, we find that the coefficients on our measures of financial statement complexity are positive
and both statistically and economically significant. These findings help alleviate concerns that our results are driven by mea-
surement choices specific to management forecasts, and emphasize that our inferences are not unique to a specific voluntary
disclosure channel, but apply generally.
5.5. Two quasi-natural experiments
Table 10 presents results for our two quasi-natural experiments. Panel A (Panel B) presents mean and median values for
our measures of financial statement complexity pre- and post-SFAS 133 (pre- and post-SFAS 157), for both treatment and
control firms. Consistent with our text-based measures of financial statement complexity reflecting the complexity of the
underlying accounting rules, we find significantly larger increases in both ReadIndex and Length for firms affected by SFAS
133 and firms affected by SFAS 157.
Fig. 3 plots the average values of VolDisc, VolDisc8K and VolDiscPR for the sample of treatment and control firms around
the adoption of SFAS 133 (Panel A) and the adoption of SFAS 157 (Panel B). These plots provide visual evidence that both
groups of firms had similar levels and trends in voluntary disclosure prior to the rule changes, but widely divergent levels of
voluntary disclosure after the rule changes. Recall from Section 3.3 that treatment and control firms are matched on (among
other variables) VolDisc, VolDisc8K and VolDiscPR over the three years prior to the rule change; differences in these variable
prior to the rule change are small by construction. Note that data on firm-initiated press-releases begins in fiscal 2003 and is
thus not available for the SFAS 133 analysis.
Panel C of Table 10 presents results from estimating Eq. (4). Across all specifications, we find the coefficient on Post*-
Treated is highly statistically significant. Collectively, the results from our two quasi-natural experiments suggest managers
give specific consideration to the complexity of accounting standards, and help alleviate concerns that a correlated omitted
variable explains both complexity of the financial statements and voluntary disclosure.
We interpret the collective results from our two quasi-natural experiments as strengthening our inferences in three
regards. (1) The results validate that our text-based measures of financial statement complexity reflect, at least in part, the
complexity of the underlying accounting rules. (2) The tests allow us to isolate the effect of reporting complexity on financial
statement complexity, and in turn voluntary disclosure. They provide direct evidence that managers give specific con-
sideration to the complexity of accounting standards. (3) The results help alleviate concerns that a correlated omitted
variable explains both complexity of the financial statements and the demand for voluntary disclosure (e.g., that a merger
may increase the complexity of the 10-K filing and simultaneously create a demand for voluntary disclosure). To explain
these results, an omitted variable would need to be positively correlated with financial statement complexity, with
voluntary disclosure, with the timing of both rule changes, and differentially affect adopting and non-adopting firms.
5.6. Robustness tests
5.6.1. Controlling for a common time trend

In this section, we assess the robustness of our result to controlling for a common time trend in financial statement
complexity and voluntary disclosure. Li (2008) finds evidence of an increasing trend in financial statement complexity, and
Fig. 4 shows an increasing trend in management forecasts and 8-K filings from 1995 through 2012, but less of a trend for
management earnings forecasts, 8-K filings, and firm-initiated press releases after 2005. We make two clarifying points and
conduct two robustness tests to address the effect of a time trend in financial statement complexity on our results.
First, KPMG (2011) and Dyer et al. (2015) suggest the increasing trend in financial statement complexity is primarily due
to increased regulation. Given this evidence, the underlying theory that we use to motivate our tests predicts a similar trend
in voluntary disclosure–as the information processing costs associated with mandatory disclosure increase as a result of
Table 9
Alternative measures of voluntary disclosure: 8-K filings and press releases.
This table presents results from estimating the association between financial statement complexity and two alternative measures of voluntary dis-
closure: the number of 8-K disclosures (VolDisc8K) and the number of firm-initiated press releases (VolDiscPR) over the twelve months following the filing
of the 10-K. Panel A presents the average value of each measure by quintile of financial statement complexity. p-values (two-tailed) appear in brackets and
test for a difference between the extreme quintiles. Panels B and C present results from repeating the tests in Table 3 using 8-Ks and firm-initiated press
releases to measure voluntary disclosure. All other variables are as defined in Table 1. Independent variables are transformed into decile ranks and scaled to
range from 0 to 1. t-statistics appear in parentheses and are based on standard errors clustered by firm and filing date. nnn, nn, and n denote statistical
significance at the 0.01, 0.05, and 0.10 levels (two-tail), respectively. Data on 8-K filings (firm-initiated press releases) is from WRDS SEC Analytics Suite
(Ravenpack News Analytics), and covers 72,366 (36,137) firm-year observations from fiscal 1995 to 2012 (2003 to 2012).
Panel A. Univariate sorts
ReadIndex quintile Diff Diff
Variable Q1 Q2 Q3 Q4 Q5 Q5–Q1 p-value
VolDisc8K 4.93 7.40 8.67 9.41 9.39 4.46 [ o0.01]

VolDiscPR 12.83 15.24 17.35 20.06 24.55 11.72 [ o0.01]
Length quintile Diff Diff
Variable Q1 Q2 Q3 Q4 Q5 Q5–Q1 p-value
VolDisc8K 2.61 4.90 7.89 10.75 13.64 11.03 [ o0.01]

VolDiscPR 9.96 10.38 14.07 17.83 26.71 16.75 [ o0.01]
Panel B. Alternative measure of voluntary disclosure: 8-K filings
Dependent variable: VolDisc8K
Variable (1) (2) (3) (4)

(12.28) (13.13) (57.93) (48.21)
Control variables
(17.71) (15.29) (9.34) (10.06)
ROA 3.13nnn 3.91nnn 2.13nnn 2.50nnn

(9.68) (12.63) (9.37) (11.33)
Leverage 1.16nnn 0.83nnn 0.35nnn –0.10

(7.18) (3.34) (2.61) (–0.48)
MTB –2.66nnn –2.72nnn –0.49nn –0.42

(–8.54) (–8.07) (–2.28) (–1.60)
SpecialItems –0.15 –0.90nnn 0.00 –0.33nnn

(–1.20) (–8.22) (0.04) (–3.55)
Loss 2.50nnn 1.40nnn 1.08nnn 0.71nnn

(18.70) (12.61) (10.50) (7.77)
Returns 0.08 0.17 0.33 0.30

(0.23) (0.59) (1.36) (1.41)
σReturns –1.81nnn –2.31nnn –1.84nnn –2.29nnn

(–5.01) (–6.37) (–7.25) (–9.05)

Observations 72,366 72,366 72,366 72,366
R2 (%) 16.8 54.5 33.8 62.0
Table 9 (continued )
Panel C. Alternative measure of voluntary disclosure: Press releases
Dependent variable: VolDiscPR
Variable (1) (2) (3) (4)
Panel C. Alternative measure of voluntary disclosure: Press releases
Dependent variable: VolDiscPR
Variable (1) (2) (3) (4)
nnn nnn nnn

FS_Complexity 6.05 4.17 9.04 6.61nnn
(5.28) (6.05) (7.45) (8.57)
Control variables
(15.66) (8.93) (14.66) (8.43)
ROA 2.16nn 0.38 2.58nn 0.49

(2.03) (0.66) (2.45) (0.85)
Leverage 0.30 0.23 –0.82 –0.13

(0.39) (0.40) (–1.08) (–0.22)
MTB –7.29nnn –5.45nnn –6.36nnn –5.03nnn

(–5.04) (–6.92) (–4.39) (–6.36)
SpecialItems –2.96nnn –0.73nnn –3.02nnn –0.66nn

(–4.45) (–2.72) (–4.51) (–2.47)
Loss 1.00nnn –0.44n 0.57 –0.54nn

(2.63) (–1.87) (1.48) (–2.28)
Returns –1.70nn 1.23nnn –1.39nn 1.35nnn

(–2.36) (2.94) (–2.03) (3.37)
σReturns 4.61nnn 3.27nnn 3.66nnn 2.88nnn

(4.40) (5.52) (3.39) (4.86)

Observations 36,137 36,137 36,137 36,137
R2 (%) 11.2 87.3 11.3 87.3
greater regulation, managers increasingly compensate with voluntary disclosure. In other words, a trend in financial
statement complexity should cause a similar trend in voluntary disclosure. Thus, one way to view a common trend in
financial statement complexity and voluntary disclosure is as a prediction rather than an alternative explanation. If a
common trend is a prediction, then controlling for it potentially introduces the “bad controls” problem discussed in Angrist
and Pischke (2009) and Bertomeu et al. (2016), and biases against finding a relation between financial statement complexity
and voluntary disclosure.20 Nevertheless, it is important to show that our results are not driven exclusively by common
temporal variation in the variables of interest.
Second, common time trends are unlikely to explain some of our most important findings, specifically, (1) the results
from our cross-sectional tests–that the relation between financial statement complexity and voluntary disclosure is stronger
when liquidity decreases around the filing of the financial statements, is stronger in firms with more outside monitors, and
is weaker when firms have poor performance and greater earnings management–and (2) the results from our two quasi-
natural experiments. In the latter analysis, recall that we employ a generalized difference-in-differences design that
removes common trends.
20
In the context of our setting, it is straightforward to show that if X (financial statement complexity) causes Y (voluntary disclosure), a time trend in X
causes a time trend in Y, and that controlling for a time trend in a regression of a noisy measure of Y on a noisy measure of X biases the coefficient on X
downwards.
Table 10
Two quasi-natural experiments: Changes in accounting standards.
This table presents results from estimating the effects of two changes in accounting standards, SFAS 133 and SFAS 157, on voluntary disclosure. For each change in
accounting standards, we use a sample of firms affected by the change (“treatment”) and a propensity score matched sample of firms unaffected by the change
(“control”). We match firms on the basis of control variables in Table 3, and average value of VolDisc, VolDisc8K, and VolDiscPR over the three years prior to the
respective change in accounting standards. Tests for covariate balance appear in Table B2 in Appendix B. Panel A presents the difference in mean and median values
of our measures of financial statement complexity before and after SFAS 133. Panel B presents the difference in mean and median values of our measures of financial
statement complexity over the three years before and after SFAS 157. DiD is the difference in differences between mean and median values of the respective variable.
p-values (two-tailed) test for differences between means and medians and appear in brackets. Panel C presents results from using a generalized difference-in-
differences design to estimate the effect of the change in accounting standards on voluntary disclosure. Columns (1) and (2) of Panel C show results for SFAS 133. In
these specifications, Post is an indicator variable equal to one for fiscal periods beginning after June 15, 2000 and zero otherwise, and Treated is an indicator variable
equal to one for firms with data on unrealized gains and losses on derivatives in accumulated other comprehensive income, and zero otherwise. Columns (3),
(4) and (5) of Panel C show results for SFAS 157. In these specifications, Post is an indicator variable equal to one for fiscal periods beginning after November 15, 2007,
and zero otherwise, and Treated is an indicator variable equal to one for firms with data on level 1, level 2 or level 3 assets or liabilities, and zero otherwise. Our
analysis spans a window of three years before and after the respective change in accounting standards. All other variables are as defined in Table 1. Independent
variables are transformed into decile ranks and scaled to range from 0 to 1. t-statistics appear in parentheses and are based on standard errors clustered by firm and
filing date. nnn, nn, and n denote statistical significance at the 0.01, 0.05, and 0.10 levels (two-tail), respectively.
Panel A. Changes in financial statement complexity around SFAS 133
Treatment Control
Measure of FS_Complexity Statistic Pre– FAS133 Post– FAS133 Pre–FAS133 Post– FAS133 DiD p–value DiD ¼ 0
ReadIndex Mean –0.12 –0.02 0.06 –0.03 0.19 [ o 0.01]

Median –0.21 –0.20 –0.05 –0.17 0.13 [ o 0.01]
Length Mean 9.91 10.15 10.02 10.14 0.12 [ o 0.01]

Median 9.92 10.15 9.99 10.15 0.07 [ o 0.01]
Panel B. Changes in financial statement complexity around SFAS 157
Treatment Control
Measure of FS_Complexity Statistic Pre- FAS157 Post- FAS157 Pre- FAS157 Post- FAS157 DiD p–value DiD ¼ 0
ReadIndex Mean 0.07 0.21 0.08 0.11 0.11 [ o 0.01]

Median 0.02 0.16 0.05 0.09 0.10 [ o 0.01]
Length Mean 10.47 10.62 10.43 10.42 0.16 [ o 0.01]

Median 10.46 10.61 10.46 10.44 0.17 [ o 0.01]
Panel C. Generalized difference-in-differences design
Variable SFAS 133 SFAS 157
VolDisc VolDisc8K VolDisc VolDisc8K VolDiscPR

(1) (2) (3) (4) (5)
Post n Treated 0.50nn 0.71nnn 1.15nnn 1.29nnn 2.64nnn

(2.39) (2.85) (2.99) (3.21) (3.94)
Control variables
Size 3.36nnn –2.26nn 2.97nnn –1.53n 9.25nnn
(6.81) (–2.47) (3.55) (–1.71) (5.55)
ROA 0.62nnn 0.17 0.06 –0.02 –0.65

(2.75) (0.51) (0.17) (–0.06) (–0.92)
Leverage 0.26 –0.57 0.28 0.09 0.96

(0.69) (–1.42) (0.44) (0.18) (0.95)
MTB –0.12 2.04nnn 1.20nnn 1.23n 0.08

(–0.41) (3.50) (2.87) (1.82) (0.08)
SpecialItems –0.04 0.49nn 0.22 0.32 0.39

(–0.31) (2.41) (1.06) (1.20) (1.04)
Loss –0.34n 0.10 –0.45n 0.46n –0.72

(–1.94) (0.48) (–1.86) (1.80) (–1.41)
Returns –0.32nn –0.23 0.17 –0.74nn –0.37

(–2.04) (–1.31) (0.62) (–2.47) (–0.69)
σReturns –0.03 0.20 –0.72nn –0.26 0.72

(–0.15) (0.68) (–2.48) (–0.64) (0.85)
Fixed Effects Firm & Year Firm & Year Firm & Year Firm & Year Firm & Year
Observations 10,880 10,880 18,405 18,405 18,405
R2 (%) 48.8 62.0 77.2 64.0 82.6
Panel A. Voluntary disclosure around SFAS 133

4 10
8
3
VolDisc8K
6
VolDisc
2
4
1
2
Treatment Treatment
Control Control
0 0
1998 1999 2000 2001 2002 2003 1998 1999 2000 2001 2002 2003
Year Year
Panel B. Voluntary disclosure around SFAS 157

6 15
VolDisc8K
VolDisc
4 10
Treatment Control Treatment Control

2 5
2005 2006 2007 2008 2009 2010 2005 2006 2007 2008 2009 2010
Year Year
25
20
VolDiscPR
15
Treatment Control
10
2005 2006 2007 2008 2009 2010
Year
Fig. 3. Time-series of voluntary disclosure for treatment and control firms around SFAS 133 and SFAS 157. This figure presents average values for each of
our three measures of voluntary disclosure, VolDisc, VolDisc8K, and VolDiscPR over the three years before and after the respective change in accounting
standards. For each accounting standard, we use a sample of firms affected by the change (“treatment”) and a propensity score matched sample of firms
unaffected by the change (“control”). We match treatment and control firms on the basis of control variables in Table 3, and average value of VolDisc,
VolDisc8K, and VolDiscPR over the three years prior to the change in accounting standards. Panel A presents results for SFAS 133. The pre-period in Panel A is
1998 to 2000, and the post-period is 2001 to 2003. Panel B presents results for SFAS 157. The pre-period in Panel B is 2005 to 2007, and the post-period is
2008 to 2010. Panel A. Voluntary disclosure around SFAS 133, Panel B. Voluntary disclosure around SFAS 157,
Nevertheless, to mitigate any remaining concerns that our collective results are driven by time trends, we conduct two
sets of robustness tests. We begin by re-estimating the pooled regressions presented in Tables 3 through 6 including year
fixed effects. By including year fixed effects, our regressions rely exclusively on within-year variation in voluntary disclosure
and financial statement complexity. Consistent with a common time trend in both financial statement complexity and
voluntary disclosure, Panel A of Table 11 shows the statistical and economic significance of the relation between financial
31.00
VolDisc VolDisc_Earn
VolDisc8K VolDiscPR
26.00
Value (relative to 1995)

21.00
16.00
11.00
6.00
1.00
1995 2000 2005 2010
Year
Fig. 4. Time trends in voluntary disclosure. This figure plots time series of average values of our measures of voluntary disclosure by fiscal year of the 10-K
filing. VolDisc, VolDisc_Earn, VolDisc8K, and VolDiscPR are the number of management forecasts, the number of management earnings forecasts, the number
of 8-K filings, and the number of firm-initiated press releases, respectively, over the 12 months following the filing of the 10-K. We consider forecasts of the
following items to be earnings forecasts: EBITDA, EBITDA per share, EPS, net income, operating profit, pre-tax income, return on assets, and return on
equity. Averages are normalized to 1995 values.
statement complexity and voluntary disclosure is attenuated when year fixed effects are included, and Panel B shows that
statistical and economic significance of our cross-sectional tests are generally not affected by the inclusion of year fixed
effects.
As an additional robustness check, we re-estimate Eq. (1) on an annual basis. This is known as a Fama and MacBeth
(1973) regression. Specifically, for each year t ¼ 1995, …, 2012, we estimate the cross-sectional regression:
VolDisct þ 1 ¼ φt þ β t FS_Complexityt þ θt Controlst þ εt ð5Þ
where both the intercept (φt) and coefficients on all independent variables (βt and θt) are allowed to vary by year. If the
relation between financial statement complexity and voluntary disclosure is driven by time trends, we would not expect to
observe a cross-sectional relation within a given year (e.g., β2009 4 0).
Note that Eq. (5) is a generalization of a pooled regression specification that includes year fixed effects–which constrains
βt (and θt) to be the same in every period. Thus, estimating separate annual cross-sectional regressions is a more rigorous
way to control for common time trends in financial statement complexity and voluntary disclosure, as it allows both the
intercept and coefficients on all independent variables to vary each year (see Petersen (2009) and Gow et al. (2010) for more
details on these methods and their limitations).
Panel A of Table 12 presents results from estimating Eq. (5) each year over our sample period. We present the time-series
average of βt, where standard errors are based on 18 separate cross-sectional regressions. Consistent with the relation
between financial statement complexity and voluntary disclosure being driven by both time-series and cross-sectional
variation in the variables of interest, we find coefficients are attenuated but remain significant at conventional levels in 5 of
6 tests.21
Panel B of Table 12 presents results from estimating Eq. (5) over various time periods. First, we analyze the period from
1995 to 1999, before “Regulation Fair Disclosure” (“RegFD”) became effective. Prior to RegFD, managers could use an
alternative channel–private communication (or “selective disclosure”)–to clarify information in financial statements.
However, beginning in October 2000, RegFD prohibited firms from disclosing material information to select groups of
market participants and effectively eliminated this channel. Second, we analyze the period from 2000 to 2004, after RegFD
but before the “Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date” rule (“Rule8K”) became
effective. Rule8K, which became effective in August 2004, expanded the mandatory disclosure requirements of Form 8-K
filings (e.g., required firms to furnish earnings announcements on Form 8-K) and shortened the filing deadlines for certain
reportable events to four business days after the occurrence of the event. Third, we analyze the sample period from 2005 to
2012, after both RegFD and Rule8K became effective. Within each period, we present the coefficient estimate and associated
t-statistic calculated based on standard errors clustered by firm and filing date.
We find that the association between financial statement complexity and voluntary disclosure is relatively weak in the
period before RegFD became effective: the association between financial statement complexity and 8-Ks remains positive
and significant (columns (3) and (4)), but the association between financial statement complexity and management fore-
casts is not statistically significant (columns (1) and (2)). However, in both periods subsequent to RegFD, we find that the
21
Note that we do not Newey-West correct the Fama-Macbeth standard errors as such a correction is known to be biased (e.g., Gow et al., 2010). One of
the advantages of estimating a pooled regression is that it is straightforward to correct for both time-series and cross-sectional dependence using two-way
cluster robust standard errors.
258
Table 11
Robustness to time trends: Part I.
This table presents results from estimating our pooled and cross-sectional tests after including year fixed effects. Panel A presents results from repeating our pooled tests in Table 3 for each measure of financial
statement complexity and voluntary disclosure after including year fixed effects. Panel B presents results from repeating our cross-sectional tests in Tables 4, 5, and 6 after including year fixed effects. For
parsimony, we do not tabulate coefficients on control variables or main effects. All variables are as defined in Table 1. t-statistics appear in parentheses and are based on standard errors clustered by firm and filing
date. nnn, nn, and n denote statistical significance at the 0.01, 0.05, and 0.10 levels (two-tail), respectively.
Panel A. Financial statement complexity and voluntary disclosure
Dependent variable: VolDisc VolDisc8K VolDiscPR
Measure of FS_Complexity: ReadIndex Length ReadIndex Length ReadIndex Length

Variable (1) (2) (3) (4) (5) (6)
0.21n 0.26nn 0.92nnn 3.88nnn 4.69nnn 7.01nnn

FS_Complexity
(1.91) (1.98) (8.08) (21.38) (3.91) (5.52)
Controls Yes Yes Yes Yes Yes Yes

Year Effects Yes Yes Yes Yes Yes Yes
N 72,366 72,366 72,366 72,366 36,137 36,137
R2 (%) 24.9 24.9 52.2 53.7 11.9 12.0
Panel B. Cross-sectional tests: Illiquidity, external monitors, firm performance and earnings management
Table 4 þ Year Effects Table 5 þ Year Effects Table 6 þ Year Effects
Measure of FS_Complexity: ReadIndex Length Measure of FS_Complexity: ReadIndex Length Measure of FS_Complexity: ReadIndex Length
Variable (1) (2) Variable (3) (4) Variable (5) (6)
FS_Complexity x ΔIlliquidity 0.85nnn 1.50nnn FS_Complexity x NAnalysts 2.02nnn 4.72nnn FS_Complexity x ROA 3.68nnn 4.51nnn
(4.80) (7.24) (5.16) (11.30) (9.58) (11.46)
FS_Complexity x ΔSpread 0.25nn 0.25n FS_Complexity x NInstitutions 1.86nnn 2.66nnn FS_Complexity x Loss –1.35nnn –2.80nnn
(2.05) (1.72) (4.85) (7.17) (–6.56) (–13.77)
FS_Complexity x AbAcc –1.01nnn –1.91nnn
(–4.14) (–7.41)
Controls Yes Yes Controls Yes Yes Controls Yes Yes

Main Effects Yes Yes Main Effects Yes Yes Main Effects Yes Yes
Year Effects Yes Yes Year Effects Yes Yes Year Effects Yes Yes
Observations 69,066 69,066 Observations 72,366 72,366 Observations 59,068 59,068
R2 (%) 24.9 24.9 R2 (%) 29.5 30.6 R2 (%) 26.4 27.1
Table 12
Robustness to time trends: Part II.
This table presents results from estimating the association between financial statement complexity and voluntary disclosure by year. Panel A presents
results from estimating the regressions in Table 3 each fiscal year from 1995 to 2012 using separate annual cross-sectional regressions. For each
specification, we report the time-series average of the estimated coefficients (FM coef.), the corresponding t-statistics for whether the average coefficient is
different from zero (FM t-stat), the number of positive coefficients, and the average annual R2. Panel B presents results from estimating the pooled
regressions in Table 3 over three sub-samples: 1995 to 1999, before Regulation Fair Disclosure became effective (Pre-RegFD); 2000 to 2004, after RegFD but
before the “Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date” rule became effective (Post-RegFD and Pre-Rule8K); and 2005 to
2012, after both rules became effective (Post-RegFD and Post-Rule8K). t-statistics within each period in Panel B are based on standard errors clustered by
firm and filing date. nnn, nn, and n denote statistical significance at the 0.01, 0.05, and 0.10 levels (two-tail), respectively. Sample of 72,366 firm-year
observations from 1995 to 2012 with data on management forecasts and 8-K filings, and 36,137 firm-year observations from 2003 to 2012 with data on
firm-initiated press releases.
Panel A. Annual cross-sectional regressions
Variable Statistic (1) (2) (3) (4) (5) (6)
nnn nnn nnn nnn

FS_Complexity FM coef. 0.29 –0.01 1.07 4.21 4.54 6.98nnn
FM t-stat. (3.72) (–0.10) (10.18) (9.30) (14.22) (19.63)

Years 1995-2012 1995-2012 1995-2012 1995-2012 2003-2012 2003-2012
# of FS_Complexity coefs 4 0 16 of 18 8 of 18 18 of 18 18 of 18 10 of 10 10 of 10
Average annual R2 (%) 17.0 16.8 10.6 26.1 11.0 11.2
Panel B. Time-period subsamples

Variable (1) (2) (3) (4) (5) (6)
Time Period: 1995 to 1999, Pre-RegFD and Pre-Rule8K

FS_Complexity –0.02 –0.03 0.66nnn 1.71nnn . .
(–0.63) (–1.17) (7.24) (14.43) . .
Controls Yes Yes Yes Yes . .

N 22,102 22,102 22,102 22,102 . .
R2 (%) 8.7 8.7 10.7 12.0 . .
Time Period: 2000 to 2004, Post-RegFD and Pre-Rule8K

FS_Complexity 0.41nnn 0.89nnn 2.08nnn 8.03nnn . .
(3.21) (5.29) (9.49) (20.50) . .
Controls Yes Yes Yes Yes . .

N 20,742 20,742 20,742 20,742 . .
R2 (%) 15.0 15.2 16.3 25.2 . .
Time Period: 2005 to 2012, Post-RegFD and Post-Rule8K

FS_Complexity 0.79nnn 0.51nnn 1.32nnn 5.75nnn 5.88nnn 8.46nnn
(3.07) (1.75) (5.85) (20.94) (4.73) (6.57)

N 29,522 29,522 29,522 29,522 29,522 29,522
R2 (%) 20.8 20.7 12.2 15.5 11.0 11.2
association between financial statement complexity and voluntary disclosure remains positive and significant in all six of
our specifications. In untabulated analyses, across all specifications, we find the difference in the coefficients on financial
statement complexity before and after RegFD is statistically significant at conventional levels (two-tailed p-values o 0.10).
These results are consistent with the notion that RegFD increases the incentives for managers to use voluntary disclosure (as
opposed to selective disclosure) to mitigate the informational problems created by complex financial statements.
Taken together the results suggest (1) that common temporal variation in financial statement complexity and voluntary
disclosure exists, and (2) that our inferences are robust to removing such variation. In closing on this point, although we
view common temporal variation in financial statement complexity and voluntary disclosure as being consistent with our
hypotheses, we leave it to future research to further explore the economic forces driving temporal variation in these
constructs (e.g., Dyer et al., 2015).
5.6.2. Alternative explanation: differences in economic activity

In this section, we assess the robustness of our results to controlling for potential differences in economic activity that
might independently cause both financial statement complexity and voluntary disclosure. For example, a merger might be
expected to not only increase voluntary disclosure indirectly, by affecting financial statement complexity (as illustrated in
Fig. 1), but also increase voluntary disclosure directly (independent of its effect on financial statement complexity). We make
three points.
First, differences in economic activity are unlikely to explain why the relation between financial statement complexity
and voluntary disclosure varies with the timing of the 10-K filing, or why it varies with the change in liquidity around the
10-K filing. Second, differences in economic activity are unlikely to explain the results from our two quasi-natural
experiments, which are designed to identify the effect of changes in accounting standards on financial statement complexity
separate and apart from the effect of business complexity. Third, if our results are attributable to omitted differences in
economic activity, then among firms with similar economic activities, we would not expect to observe a relation between
financial statement complexity and voluntary disclosure.
Accordingly, as a robustness test, we estimate the relation between financial statement complexity and voluntary dis-
closure using a propensity score matched sample of firms with similar levels of economic activity. Specifically, we match
firms in the top decile of financial statement complexity to control firms based on the variables used in Bushee et al. (2015)
to measure the complexity of the firm's business transactions: firm size, leverage, growth opportunities, returns, mergers/
acquisitions, PP&E, capital expenditures, R&D, stock and debt issuances, cash flow volatility, goodwill impairments, and
restructuring charges.22 We restrict the analysis to the 2003 to 2012 period when all measures of voluntary disclosure are
available, and we match treatment to control firms within each year. Variable definitions, details on the matching procedure,
and results appear in Table B3 of Appendix B. We find that firms in the top decile of financial statement complexity have
greater voluntary disclosure than their matched sample counterparts, suggesting that differences in economic activity
related to mergers, R&D, etc. are unlikely to explain our results.
5.6.3. Additional untabulated analyses

Appendix C discusses results of several untabulated analyses relating to: (i) whether the additional voluntary disclosure
is misleading, (ii) combining 10-K length and readability into a single measure of financial statement complexity, (iii)
comparing the complexity of firms’ 10-K filings with the complexity of their 8-K filings, (iv) whether the relation between
financial statement complexity and voluntary disclosure varies with analysts’ reaction to the 10-K filing, and (v) concerns
about temporal changes in IBES database coverage.
6. Future research
While our evidence suggests that lower information accessibility in mandatory disclosure (in the form of complexity) is
associated with more information being released through voluntary disclosure, much work remains in understanding how
managers’ voluntary disclosure decisions relate to the information processing costs of financial statement users. Here, we
offer a few potentially promising avenues for future research.
6.1. Measurement of complexity
The sources of financial statement complexity are notoriously difficult to measure. Promising avenues for future research
on measurement issues might include refining measures of readability that were originally developed outside the context of
financial documents; developing techniques to isolate the component of financial statement complexity attributable to
reporting standards; and validating and contrasting existing measures of financial statement complexity (e.g., readability,
length, number of numbers, electronic file size). In developing new measures, or refining existing measures, it is important
to be mindful of the economic construct of interest–information processing costs.
6.2. Conceptualizing information processing costs
Much of the empirical disclosure literature is premised on theoretical models of disclosure that assume costless infor-
mation processing (e.g., Verrecchia, 2001). However, the presence of processing costs makes the effects of disclosure more
nuanced; the effect of disclosure on uncertainty will depend on the information content of the additional disclosure and the
effect of the additional disclosure on information processing costs. If the increase in processing costs exceeds the increase in
information content, the additional disclosure will increase information uncertainty. For example, Goldman Sachs’ 2012 10-
K is approximately 480 pages long. The effect of adding an additional 200 pages depends not only on their information
content and the added cost associated with processing these 200 pages, but also on whether weaving these 200 pages into
22
Results are robust to additionally matching on the absolute value of returns, on return-on-assets, and an indicator variable for whether the firm had
a loss.
the document increases the information processing costs associated with the original 480 pages. If so, the additional dis-
closure increases not just the total cost of processing information but also the marginal cost of processing information. In this
circumstance, “less is more,” as reflected in the quote from SEC Chair Mary Jo White in our introduction.
6.3. Contexts outside of the 10-K
Following Li (2008), extant research has primarily focused on the complexity of financial statements, i.e., 10-K filings.
However, we know little about the complexity of other forms of disclosure, such as 8-K filings, press releases, and con-
ference calls, and how they relate to one another. In moving beyond the 10-K setting, future research should be mindful that
complexity of a document needs to be interpreted in context. It is not clear to what extent inferences obtained from
studying the complexity of one type/form of disclosure (e.g., the 10-K) generalize to other types/forms of disclosure (e.g.,
8-Ks, press releases, conference calls). For example, the complexity of an 8-K that discloses a supply contract has different
meaning and different implications than the complexity of an 8-K that discloses a director's resignation. The causes and
consequences of complexity likely vary with the type/form of the disclosure.
6.4. Moving beyond valuation-based explanations
Much of the theoretical and empirical work on voluntary disclosure emphasizes the valuation implications of disclosure choices.
However, equity investors are but one of several groups of contracting parties that are affected by financial statement complexity
and subject to information processing costs. For example, customers, suppliers, employees, creditors and regulators all have vested
interests in managers’ disclosure decisions and, importantly, exert influence on these decisions. Further, equity investors’ concerns
about resolving uncertainty stem not only from their interest in setting market prices efficiently, but also from their governance-
related interest in monitoring managers’ investment, financing, and strategic business decisions. We encourage future research to
consider how financial statement complexity affects other contracting parties and vice-versa.
7. Conclusion
A growing literature documents that complex financial statements negatively affect the information environment. In this
paper, we examine whether managers use voluntary disclosure to mitigate these negative effects. We test our predictions by
analyzing the relation between financial statement complexity and voluntary disclosure using three distinct sets of tests,
and using multiple measures of financial statement complexity and voluntary disclosure.
First, using cross-sectional and within-firm designs, we find (1) a positive association between financial statement
complexity and voluntary disclosure over periods ranging from one to twelve months after the filing of the 10-K, (2) within
a firm, increases in financial statement complexity are associated with increases in voluntary disclosure, and (3) financial
statement complexity of a given 10-K has a greater association with voluntary disclosure after the 10-K filing than voluntary
disclosure before the 10-K filing.
Second, examining cross-sectional variation in the relation between financial statement complexity and voluntary disclosure,
we find that the relation is stronger when liquidity decreases around the filing of the financial statements and when firms have
more outside monitors, and that the relation is weaker when firms have poor performance and greater earnings management.
Third, employing two quasi-natural experiments, we find that firms affected by the adoption of complex accounting stan-
dards (e.g., SFAS 133 and SFAS 157) increase voluntary disclosure to a greater extent than unaffected firms. We conduct a battery
of sensitivity tests and supplemental analyses, and we find our results are robust to changes in research design, variable
measurement, and controlling for common temporal variation in financial statement complexity and voluntary disclosure.
By using three distinct research designs, multiple measures of financial statement complexity and voluntary disclosure, and
conducting a battery of sensitivity tests, we strive to alleviate concerns that our collective results are attributable to alternative
explanations. However, we recognize that we cannot definitively rule out the possibility that our results are driven by an omitted
variable, and that more research is needed to understand how financial statement complexity–and information processing costs
broadly–affect managers’ disclosure decisions, and in turn, the relation between disclosure and information uncertainty.
Collectively, our results are consistent with the notion that managers trade off various disclosure mediums in attempting
to achieve an optimal information environment. While prior research documents that complex financial statements
negatively affect the information environment, our results suggest that some firms attempt to mitigate these effects using
voluntary disclosure. Consistent with mandatory and voluntary disclosure serving as substitutes, we find that lower
information accessibility in mandatory disclosure (in the form of complexity) is associated with more information being
released through voluntary disclosure. Our results suggest a more nuanced view of how financial statement complexity
affects the mosaic of public information about the firm.
Appendix A. Details on readability index
We construct our readability index (ReadIndex) as the first principal component of the six measures of readability defined
below. Higher values of ReadIndex correspond to less readable text. Each measure of readability is normalized prior to
conducting the factor analysis. Factor analysis is conducted on the full sample of 10-Ks between 1995 and 2012 prior to
requiring data on control variables (sample of 86,236 firm-year observations).
Measures of readability
Flesch Kincaid The Flesch-Kincaid Readability Index:

0.39 * (number of words/number of sentences)
þ 11.8 * (number of syllables/number of words) – 15.59
LIX The LIX Readability Index is equal to:
(number of words / number of sentences)
þ (number of words over 6 letters * 100/ number of words)
RIX The RIX Readability Index:
(number of words with 7 characters or more) / (number of sentences)
Fog The Gunning Fog Index:
0.4 * (number of words/number of sentences)
þ 40 * (number of words with more than two syllables / number of words)
ARI The Automated Readability Index (ARI):
4.71 * (number of characters / number of words)
þ 0.5 * (number of words / number of sentences) 21.43
SMOG The SMOG Index:
1.043 * sqrt (30 * number of words with more than two syllables / number of sentences) þ 3.1291
Principal component output
Factor Eigenvalue Proportion of the variation Cumulative Proportion of the variation Readability First Principal Component
explained explained Measures Weights
1st 5.62 93.62% 93.62% FleschKincaid 0.17400

2nd 0.21 3.43% 97.05% LIX 0.17584
rd
3 0.11 1.85% 98.91% RIX 0.17545
th
4 0.05 0.82% 99.72% Fog 0.16306
th
5 0.01 0.19% 99.91% ARI 0.17321
6th 0.01 0.09% 100.00% SMOG 0.17253
Correlation matrix
(1) (2) (3) (4) (5) (6) (7)
(1) 0.97 0.99 0.97 0.91 0.98 0.96

(2) 0.95 0.95 0.94 0.84 0.95 0.91
(3) 0.96 0.96 0.93 0.89 0.94 0.98
(4) 0.96 0.96 0.95 0.84 1.00 0.90
(5) 0.87 0.86 0.90 0.86 0.85 0.85
(6) 0.97 0.95 0.94 0.99 0.84 0.90
(7) 0.94 0.93 0.98 0.93 0.87 0.92
Legend: (1) ReadIndex, (2) Flesch Kincaid, (3) LIX, (4) RIX, (5) Fog, (6) ARI, (7) SMOG.
Appendix B. Robustness tests
This appendix reports results for robustness tests briefly described in the paper.
Table of Contents of Appendix B:
Table B1. Robustness test: Partitioning by voluntary disclosure behavior

Panel A. Partitioning by prior forecasting behavior
Panel B. Partitioning by earnings and non-earnings forecasts
Panel C. Partitioning by bundled and non-bundled forecasts
Table B2. Quasi-natural experiments: Covariate balance

Panel A. Covariate balance between observations affected and unaffected by SFAS 133
Panel B. Covariate balance between observations affected and unaffected by SFAS 157
Table B3. Robustness test: Economic Activity

Panel A. Matched sample for firms in top decile of ReadIndex
Panel B. Matched sample for firms in top decile of Length
Panel C. Regression analysis on matched samples
Table B1
Robustness test: Partitioning by voluntary disclosure behavior.
Panel A presents results from repeating the tests in Table 3 after conditioning on the firm's prior forecasting behavior. We estimate the regressions in Table 3
separately for two groups of firms: (1) firms that provided a management forecast over the twelve months prior to the filing of the 10-K, sample of 25,093 firm-
years, and (2) firms that did not provide a management forecast over the twelve months prior to filing the 10-K, sample of 47,273 firm-years. Panel B presents
results from repeating the tests in Table 3 after separately identifying earnings forecasts (VolDisc_Earn) and non-earnings forecasts (VolDisc_NonEarn), where
VolDisc is the sum of VolDisc_NonEarn and VolDisc_Earn. We consider forecasts of the following items to be earnings forecasts: EBITDA, EBITDA per share, EPS,
net income, operating profit, pre-tax income, return on assets, and return on equity. Sample of 72,366 firm-years. Panel C presents results from repeating the
tests in Table 3 using only management forecasts issued between the filing of the 10-K and the first earnings announcement thereafter (VolDisc_EA), and
separately identifying forecasts bundled with the earnings announcement (VolDisc_EA_Bun) and forecasts not bundled with the earnings announcement
(VolDisc_EA_NonBun), where VolDisc_EA is the sum of VolDisc_EA_Bun and VolDisc_EA_NonBun. We classify forecasts as bundled forecasts if they fall within one
day of the earnings announcement. Sample of 70,670 firm-years with data on the subsequent earnings announcement from Compustat. For parsimony, we do
not tabulate coefficients on control variables and present results only for specifications that include firm fixed effects. t-statistics appear in parentheses and are
based on standard errors clustered by firm and filing date. nnn, nn, and n denote statistical significance at the 0.01, 0.05, and 0.10 levels (two-tail), respectively.
Panel A. Partitioning by prior forecasting
Variable FS_Complexity ¼ ReadIndex FS_Complexity ¼ Length
Yes No Yes No
Provided a forecast over the prior 12 months (1) (2) (3) (4)
FS_Complexity 2.57nnn 0.06n 6.99nnn 0.34nnn

(7.51) (1.77) (17.13) (7.61)

Firm Effects Yes Yes Yes Yes
Observations 25,093 47,273 25,093 47,273
R2 (%) 62.6 51.4 64.6 51.5
Panel B. Partitioning by earnings and non-earnings forecasts
Dependent variable Earnings forecasts Non-Earnings forecasts Earnings forecasts Non-Earnings forecasts
(VolDisc_Earn) (VolDisc_NonEarn) (VolDisc_Earn) (VolDisc_NonEarn)
Variable (1) (2) (3) (4)

(6.74) (9.99) (15.93) (22.65)

Firm Effects Yes Yes Yes Yes
Observations 72,366 72,366 72,366 72,366
R2 (%) 59.2 53.9 60.1 56.3
Panel C. Partitioning by bundled and non-bundled forecasts
Dependent From filing From filing until From filing until next EA: From filing From filing until From filing until next EA:
variable until next EA: next EA: Bundled Non-bundled forecasts until next EA: next EA: Bundled Non-bundled forecasts
All forecasts forecasts (VolDisc_EA_NonBun) All forecasts forecasts (VolDisc_EA_NonBun)
(VolDisc_EA) (VolDisc_EA_Bun) (VolDisc_EA) (VolDisc_EABun)
Variable (1) (2) (3) (4) (5) (6)
FS_Complexity 0.42nnn 0.39nnn 0.04nnn 1.11nnn 0.95nnn 0.17nnn

(9.98) (10.69) (3.00) (20.72) (21.73) (9.88)

Firm Effects Yes Yes Yes Yes Yes Yes
Observations 70,670 70,670 70,670 70,670 70,670 70,670
R2 (%) 51.1 54.1 24.4 52.7 55.8 24.6
Table B2
Quasi-natural experiments: Covariate balance.
This table presents cross-sample differences in mean and median values of the variables used to match treatment and control firms for our two quasi-
natural experiments. Panel A presents the difference in mean and median values for the firms affected by SFAS 133 (Treatment Firms) and their propensity
score matched sample counterparts (Control Firms). Panel B presents the difference in mean and median values for the firms affected by SFAS 133
(Treatment Firms) and their propensity score matched sample counterparts (Control Firms). Treatment firms are matched to control firms prior to change in
accounting standards on the basis of control variables in Table 3 and the average number of management forecasts, 8-K filings, and firm-initiated press
releases over the prior three years (VolDisc_3YrAvg, VolDisc8K_3YrAvg, and VolDiscPR_3YrAvg, respectively). p-values (two-tailed) test for differences
between means and medians and appear in brackets.
Panel A. Covariate balance between observations affected and unaffected by SFAS 133
Variable Treatment Firms Control Firms Diff. in means p–value Diff. in medians p–value
Mean Median Mean Median
VolDisc_3YrAvg 0.47 0.00 0.46 0.00 0.01 [0.78] 0.00 NA

VolDisc8K_3YrAvg 2.50 1.67 2.61 2.00 –0.11 [0.39] –0.33 [0.22]
Size 6.25 6.22 6.41 6.41 –0.16 [0.27] –0.19 [0.20]
ROA 0.28 0.16 0.26 0.15 0.02 [0.19] 0.01 [0.56]
Leverage 0.30 0.29 0.33 0.32 –0.03 [0.34] –0.03 [0.43]
MTB 1.74 1.18 1.83 1.19 –0.09 [0.32] –0.01 [0.81]
SpecialItems –0.01 0.00 –0.01 0.00 0.00 [0.57] 0.00 NA
Loss 0.14 0.00 0.15 0.00 –0.01 [0.37] 0.00 NA
Returns 0.19 –0.03 0.21 –0.05 –0.02 [0.60] 0.02 [0.33]
σReturns 0.14 0.12 0.14 0.11 0.00 [0.89] 0.01 [0.39]
Panel B. Covariate balance between observations affected and unaffected by SFAS 157
Variable Treatment Firms Control Firms Diff. in means p–value Diff. in medians p–value
VolDisc_3YrAvg 3.20 0.67 3.77 1.33 –0.57 [0.14] –0.66 [0.25]

VolDisc8K_3YrAvg 13.42 12.33 13.58 13.00 –0.16 [0.70] –0.67 [0.14]
VolDiscPR_3YrAvg 17.33 15.33 16.47 14.67 0.86 [0.47] 0.66 [0.67]
Size 6.63 6.50 6.70 6.68 –0.07 [0.45] –0.18 [0.39]
ROA 1.68 0.23 1.47 0.26 0.21 [0.26] –0.03 [0.68]
Leverage 0.21 0.16 0.21 0.15 0.00 [0.92] 0.01 [0.98]
MTB 1.93 1.45 2.01 1.61 –0.08 [0.37] –0.16 [0.08]
SpecialItems –0.01 0.00 –0.01 0.00 0.00 [0.31] 0.00 NA
Loss 0.20 0.00 0.20 0.00 0.00 [0.99] 0.00 NA
Returns 0.13 0.09 0.14 0.09 –0.01 [0.67] 0.00 [0.94]
σReturns 0.09 0.07 0.09 0.08 0.00 [0.44] –0.01 [0.37]
Table B3
Robustness Test: Economic Activity.
This table presents results from estimating the association between financial statement complexity and voluntary disclosure after matching firms in the
top decile of the respective measure of financial statement complexity (Treatment Firms) to a control sample of firms with comparable levels of economic
activity (Control Firms). The matching procedure follows Armstrong et al. (2010b). First, we estimate the probability that a firm is in the top decile of the
respective measures of financial statement complexity (e.g., the top decile of Length) as a function of various measures of the firm's economic activity. The
predicted values serve as our propensity scores. Next, we match each firm in the top decile of the respective measure of financial statement complexity to a
firm with the closest propensity score in the same year, eliminating dissimilar matched pairs, and restricting the analysis to fiscal years 2003-2012, when
all measures of voluntary disclosure are available. We follow Bushee et al. (2015) and use the following variables to measure the firm's economic activity:
Size is the natural logarithm of market value of equity, measured at the fiscal year-end; Leverage is long term debt plus short term debt, scaled by total
assets; MTB is the market value of equity plus book value of liabilities divided by book value of assets; Returns is the buy and hold return over the twelve
months prior to the 10-K filing date; Acquisitions is acquisitions scaled by total assets; CapIntensity is net plant, property, and equipment scaled by total
assets; Capex is the amount of capital expenditures scaled by total assets; R&D is the ratio of research and development expense to sales; Financing is the
amount raised from stock and debt issuances during the year scaled by total assets; σCFO is the standard deviation of cash flows from operations over the
prior five years scaled by total assets; Goodwill is an indicator variable for whether the firm had a goodwill impairment charge that year; and Restructuring
is an indicator variable for whether the firm had a restructuring charge that year. Panel A presents differences in means and medians for firms in the top
decile of ReadIndex and their matched sample counterparts. Panel B presents differences in means and medians for firms in the top decile of Length and
their matched sample counterparts. p-values (two-tailed) test for differences between means and medians and appear in brackets. Panel C presents results
from estimating the regressions in Table 3 on the respective sample of treatment and control firms. In columns (1)–(3), Treatment is an indicator variable
equal to one if the firm is in the top decile of ReadIndex and zero otherwise. In columns (4)–(6), Treatment is an indicator variable equal to one if the firm is
in the top decile of Length and zero otherwise. For parsimony we do not tabulate coefficients on control variables. t-statistics appear in parentheses and are
based on standard errors clustered by firm and filing date. nnn, nn, and n denote statistical significance at the 0.01, 0.05, and 0.10 levels (two–tail),
respectively. Sample of 3143 matched pairs from 2003 to 2012.
Panel A. Matched sample for firms in top decile of ReadIndex
Variable Treatment Firms ReadIndex Decile ¼ 10 Control Firms Diff. in means p–value Diff. in medians p–value
Size 6.81 6.84 6.75 6.70 0.06 [0.54] 0.14 [0.25]

Leverage 0.24 0.18 0.24 0.17 0.00 [0.87] 0.01 [0.53]
MTB 1.63 1.22 1.60 1.24 0.03 [0.49] –0.02 [0.40]
Returns 0.13 0.08 0.13 0.09 0.00 [0.96] 0.01 [0.72]
Acquisitions 0.02 0.00 0.02 0.00 0.00 [0.12] 0.00 NA
CapIntensity 0.14 0.06 0.13 0.05 0.01 [0.26] 0.01 [0.17]
Capex 0.03 0.01 0.02 0.01 0.01 [0.06] 0.00 [0.11]
R&D 0.13 0.00 0.14 0.00 –0.01 [0.52] 0.00 NA
Financing 0.14 0.04 0.15 0.03 –0.01 [0.64] 0.01 [0.01]
σCFO 0.07 0.03 0.07 0.03 0.00 [0.81] 0.00 [0.62]
Goodwill 0.67 1.00 0.65 1.00 0.02 [0.44] 0.00 NA
Restructuring 0.26 0.00 0.25 0.00 0.01 [0.36] 0.00 NA
Panel B. Matched sample for firms in top decile of Length
Variable Treatment Firms Length Decile ¼ 10 Control Firms Diff. in means p–value Diff. in medians p–value
Size 6.71 6.91 6.72 6.86 –0.01 [0.92] 0.05 [0.60]

Leverage 0.30 0.27 0.30 0.25 0.00 [0.88] 0.02 [0.23]
MTB 1.49 1.13 1.49 1.21 0.00 [0.94] –0.08 [ o 0.01]
Returns 0.09 0.05 0.09 0.06 0.00 [0.84] –0.01 [0.45]
Acquisitions 0.01 0.00 0.01 0.00 0.00 [0.92] 0.00 NA
CapIntensity 0.25 0.11 0.24 0.10 0.01 [0.59] 0.01 [0.79]
Capex 0.04 0.02 0.04 0.02 0.00 [0.28] 0.00 [0.51]
R&D 0.25 0.00 0.25 0.00 0.00 [0.94] 0.00 NA
Financing 0.18 0.06 0.19 0.06 –0.01 [0.75] 0.00 [0.96]
σCFO 0.07 0.03 0.08 0.03 –0.01 [0.48] 0.00 [0.64]
Goodwill 0.52 1.00 0.53 1.00 –0.01 [0.55] 0.00 NA
Restructuring 0.19 0.00 0.20 0.00 –0.01 [0.34] 0.00 NA
Panel C. Regression analysis on matched samples
Treatment ¼ 1 if ReadIndex Decile ¼ 10 ¼ 0 otherwise Treatment ¼ 1 if Length Decile ¼ 10 ¼ 0 otherwise

Dependent variable: Dependent variable:
VolDisc VolDisc8K VolDiscPR VolDisc VolDisc8K VolDiscPR
Variable (1) (2) (3) (4) (5) (6)

Treatment 3.34nnn 4.09nnn 17.13nnn 2.53nnn 6.39nnn 4.18nnn
(13.39) (19.54) (8.82) (12.15) (30.95) (4.41)

Observations 6286 6286 6286 6286 6286 6286
R2 (%) 22.2 19.1 11.9 19.2 31.5 11.6
Appendix C. Additional analyses
This appendix briefly outlines several additional analyses that were conducted.
Alternative interpretation: Voluntary disclosure as additional obfuscation
One alternative interpretation of the positive association between financial statement complexity and voluntary dis-
closure is that complex financial statements reflect an intentional choice by managers to obfuscate information, and such
managers issue more voluntary disclosure in an attempt to mislead investors and reinforce a “false narrative.” While
plausible, this alternative interpretation is generally inconsistent with the findings from our cross-sectional tests on firm
performance and earnings management (Table 6). Presumably, if firms were issuing voluntary disclosures to mislead
investors, the positive relation between financial statement complexity and voluntary disclosure would be higher when
managers have greater incentives to obfuscate. However, we find the opposite–the positive relation between financial
statement complexity and voluntary disclosure is lower when managers have greater incentives to obfuscate.
Nevertheless, we conduct two additional sets of tests. First, we examine whether the accuracy of management forecasts
varies with financial statement complexity. Lehavy et al. (2011) argue that analysts are less accurate when financial
statements are complex because analysts have less information. However, managers should not be similarly affected.
Consistent with this–and counter to the notion their forecasts are intended to mislead investors–we find no evidence that
managers’ forecasts are less accurate when financial statements are complex, and some evidence that their forecasts are
actually more accurate when financial statements are complex.23 Second, consistent with an extensive prior literature that
finds management forecasts enhance transparency, we find that management forecasts and liquidity are positively related in
our sample. The findings from our cross-sectional tests and these additional tests are inconsistent with the notion that
managers issue more voluntary disclosure in order to mislead investors.
Combining measures of financial statement complexity
Throughout all of our analyses, and consistent with an extensive prior literature (e.g., Li, 2008; Miller, 2010; Lee, 2012;
Bonsall and Miller, 2013; Lawrence, 2013), we treat ReadIndex and Length as two different empirical measures of the same
underlying construct—financial statement complexity. Accordingly, we include them separately in our regressions. However,
in untabulated analyses, we include ReadIndex and Length simultaneously in Eq. (1) and find that Length subsumes Read-
Index. The fact that one of our two measures of financial statement complexity subsumes the other is perhaps not surprising
given that these measures are fairly highly positively correlated (0.49). The empirical challenge when two variables measure
the same underlying construct is that it is difficult to predict whether and when one measure will load incrementally to
the other.
We use two common approaches to address the robustness of our analysis with respect to the simultaneous inclusion of
multiple measures of the same construct. The first approach follows Barth et al. (1997). We include both measures
simultaneously in Eq. (1) and use an F-test to determine whether the coefficients on ReadIndex and Length are jointly
different from zero. We find that the coefficients are jointly different from zero (two-tailed p-value o0.01). The second
approach follows Lang et al. (2012). We conduct a principal component analysis of our six readability measures and Length.
We find (1) that only a single factor has an eigenvalue greater than one, (2) that this factor explains 84% of the variation in all
seven variables, and (3) that this factor loads positively on Length and each of the measures of readability. This provides a
degree of confidence that both Length and Readability are measuring the same economic construct. We find inferences are
unaffected if we repeat our tests using this alternative factor to measure financial statement complexity.
Comparing financial statement complexity with the complexity of 8-Ks
We examine how ReadIndex and Length of firms’ 10-Ks compares with that of the firms’ 8-Ks. We find that firms in the
bottom (top) decile of 10-K ReadIndex have average 8-K ReadIndex of –0.05 (0.11) and 8-K Length of 6.07 (6.17). We find that
firms in the bottom (top) decile of 10-K Length have average 8-K ReadIndex of 0.02 (0.07) and 8-K Length of 6.13 (6.16). All
differences between the extreme quintiles are statistically significant at conventional levels. In other words, firms with less
readable (longer) 10-Ks also have less readable (longer) 8-Ks. However, interpreting the readability and length of 8-Ks is
challenging, as the content is not standardized across 8-Ks. For example, it is difficult to compare the readability or length of
a supply contract with, say, the readability or length of a director resignation.
23
We note that this result is already somewhat in the literature. While not their primary focus, Hutton et al. (2012) examine when managers are more
accurate than analysts, and find managers are more accurate than analysts when the Fog index is high. They do not discuss the result further (p. 1233,
Table 4).
Changes in analyst forecasts around the 10-K filing
We examine whether the relation between financial statement complexity and voluntary disclosure varies with analysts’
reaction to the 10-K filing. Analyst forecast behavior is commonly used to measure the quality of the firm's information
environment (e.g., Lang et al., 2012), so one can think of these tests as analogous to our cross-sectional tests regarding the
changes in liquidity around the 10-K (Table 4). We construct two new variables that measure the effect of the 10-K on
analysts’ forecasts: (i) the magnitude of the revision in the consensus analyst forecast around the filing of the 10-K, Revision,
and (ii) the ex post accuracy of the revised consensus forecast, ΔAccuracy.24 Per the regression specification used in our
cross-sectional tests (see for example Table 4), we interact these analyst variables with our measures of financial statement
complexity and include them in Eq. (1).
We find that managers are less likely to provide voluntary disclosure subsequent to filing complex financial statements
when analysts revise their forecasts in response to the 10-K and when those revisions are more accurate ex post. These
findings are consistent with the notion that managers use their forecasts to “guide” analysts’ expectations (e.g., Ajinkya and
Gift, 1984), and are related to prior work that documents managers have a comparative advantage in forecasting earnings of
firms with complex financial statements–when financial statement complexity is high, analysts are less accurate (e.g.,
Lehavy et al., 2011) but managers are more accurate (e.g., Hutton et al., 2012).
Change in the IBES management forecast database
Fig. 4 shows there is an increasing trend in both management forecasts and management earnings forecasts, but the
trend in the former is more pronounced. These trends could represent either an increase in the number of firms providing
forecasts, an increase in the types of forecasts firms provide, and/or an increase in IBES database coverage (e.g., Chuk et al.,
2013). We make four points.
1. Finding consistent evidence using 8-Ks and press releases as alternative measures of voluntary disclosure, which do not
rely on IBES, provides a degree of comfort that any issues related to IBES database coverage are not driving our collective
results.
2. A simple time trend in database coverage cannot explain the relation between financial statement complexity and
voluntary disclosure estimated within the context of our two quasi-natural experiments (Table 10) or estimated within a
given year (Tables 11 and 12).
3. Chuk et al. (2013) document patterns in IBES database coverage and suggest several robustness tests in an effort to
alleviate these issues. (1) Limit early years in the sample, for example by focusing on the post-Reg FD period when the
coverage of public management forecasts is more complete–Panel B of Table 12 suggests our results are strongest in the
post-Reg FD period. (2) Conduct analyses on subsets of data, for example by examining earnings forecasts which
underwent smaller changes in coverage relative to other types of forecasts–Panel A of Table B1 suggests our results are
similar regardless of whether we focus on earnings forecasts or non-earnings forecasts.
4. Additionally, we conduct two untabulated robustness tests. (1) We restrict our sample to include only those firms that
were covered in the IBES database during its early years (1995-1997), this way firm coverage does not increase. We
estimate our main tests in Table 3 within this subsample of firms and find our inferences unchanged. (2) We estimate our
main tests in Table 3 using the likelihood of issuing a forecast as our dependent variable, rather than forecast frequency,
and find our inferences unchanged.
Collectively, these analyses provide additional comfort that our results are not driven by trends in database coverage as it
pertains to a potential increase in either the number of firms covered or the types of forecasts covered.
References
Ajinkya, B., Gift, M., 1984. Corporate managers’ earnings forecasts and symmetrical adjustments of market expectations. J. Account. Res., 425–444.
Ajinkya, B., Bhojraj, S., Sengupta, P., 2005. The association between outside directors, institutional investors and the properties of management earnings
forecasts. J. Account. Res. 43, 343–376.
Amihud, Y., 2002. Illiquidity and stock returns: cross-section and time-series effects. J. Financ. Mark. 5, 31–56.
Angrist, J., Pischke, J., 2009. In: Mostly Harmless Econometrics: An Empiricist's CompanionPrinceton University Press, Princeton.
Armstrong, C., Guay, W., Weber, J., 2010a. The role of information and financial reporting in corporate governance and debt contracting. J. Account. Econ. 50,
179–234.
Armstrong, C., Jagolinzer, A., Larcker, D., 2010b. Chief executive officer equity incentives and accounting irregularities. J. Account. Res. 48, 225–271.
Armstrong, C., Foster, G., Taylor, D., 2016. Abnormal accruals in newly public companies: opportunistic misreporting or economic activity? Manag. Sci..
forthcoming.
24
Revision is the absolute value of the difference between the first median analyst consensus forecast after the 10-K filing and the last median analyst
consensus forecast prior to the 10-K filing, scaled by price at the beginning of the fiscal year. ΔAccuracy is the difference in Accuracy between the first
analyst consensus forecast after the 10-K filing and the last analyst consensus forecast prior to the 10-K filing, where Accuracy is defined as the absolute
value of the difference between the mean analyst consensus forecast and realized EPS, scaled by price at the beginning of the fiscal year and multiplied by
negative one.
Bagnoli, M., Watts, S., 2007. Financial reporting and supplemental voluntary disclosures. J. Account. Res. 45, 885–913.
Balakrishnan, K., Core, J., Verdi, R., 2014b. The relation between reporting quality and financing and investment: evidence from changes in financing
capacity. J. Account. Res. 52, 1–36.
Balakrishnan, K., Billings, M., Kelly, B., Ljungqvist, A., 2014a. Shaping liquidity: on the causal effects of voluntary disclosure. J. Financ. 69, 2237–2278.
Ball, R., Jayaraman, S., Shivakumar, L., 2012. Audited financial reporting and voluntary disclosure as complements: a test of the confirmation hypothesis.
J. Account. Econ. 53, 136–166.
Barth, M., McNichols, M., Wilson, G., 1997. Factors influencing firms’ disclosures about environmental liabilities. Rev. Account. Stud. 2, 35–64.
Bertomeu, J., Beyer, A., Taylor, D., 2016. From casual to causal inference in accounting research: the need for theoretical foundations. Found. Trends
Account.. forthcoming.
Billings, M., Jennings, R., Lev, B., 2015. On guidance and volatility. J. Account. Econ. 60, 161–180.
Bloomfield, R., 2002. The incomplete revelation hypothesis and financial reporting. Account. Horiz. 16, 233–243.
Bloomfield, R., 2008. Discussion of annual report readability, current earnings, and earnings persistence. J. Account. Econ. 45, 248–252.
Bonsall, S., Miller, B., 2013. The impact of financial disclosure complexity on bond rating agency disagreement and the cost of debt capital. Working Paper.
Bozanic, Z., Thevenot, M., 2015. Qualitative disclosure and changes in sell-side financial analysts’ information environment. Contemp. Account. Res..
Bushee, B., Miller, G., 2012. Investor relations, firm visibility, and investor following. Account. Rev. 87, 867–897.
Bushee, B., Gow, I., Taylor, D, 2015. Linguistic complexity in firm disclosures: Obfuscation or information? Working Paper.
Callen, J., Khan, M., Lu, H., 2013. Accounting quality, stock price delay and future stock returns. Contemp. Account. Res. 30, 269–295.
Campbell, J., 2015. The fair value of cash flow hedges, future profitability, and stock returns. Contemp. Account. Res. 32, 243–279.
Chasan, E., Rubenfeld, S., 2015. Firms, regulators try to sort out what's worth disclosing to investors. Wall Str. J..
Chen, S., Matsumoto, D., Rajgopal, S., 2011. Is silence golden? An empirical analysis of firms that stop giving quarterly earnings guidance. J. Account. Econ.
51, 134–150.
Chuk, E., Matsumoto, D., Miller, G., 2013. Assessing methods of identifying management forecasts: CIG vs. researcher collected. J. Account. Econ. 55, 23–42.
Coller, M., Yohn, T., 1997. Management forecasts and information asymmetry: an examination of bid-ask spreads. J. Account. Res. 35, 181–191.
Dyer, T., Lang, M., and Stice-Lawrence, L., 2015. The ever-expanding 10-K: Why are 10-Ks getting so much longer (and does it matter)? Working Paper.
Einhorn, E., 2005. The nature of the information between mandatory and voluntary disclosure. J. Account. Res. 43, 593–621.
Fama, E., MacBeth, J., 1973. Risk, return, and equilibrium: empirical tests. J. Political Econ. 81, 607–636.
Francis, J., Nanda, D., Olsson, P., 2008. Voluntary disclosure, earnings quality, and cost of capital. J. Account. Res. 46, 53–99.
Gong, G., Li, L., Xie, H., 2009. The association between management earnings forecast errors and accruals. Account. Rev. 84, 497–530.
Gow, I., Ormazabal, G., Taylor, D., 2010. Correcting for cross-sectional and time-series dependence in accounting research. Account. Rev. 85, 483–512.
Graham, J., Harvey, C., Rajgopal, S., 2005. The economic implications of corporate financial reporting. J. Account. Econ. 40, 3–73.
Grossman, S., Stiglitz, J., 1980. On the impossibility of informationally efficient markets. Am. Econ. Rev., 393–408.
Hansen, C., 2007. Generalized least squares inference in panel and multilevel models with serial correlation and fixed effects. J. Econ. 140, 670–694.
Hirshleifer, D., Teoh, S., 2003. Limited attention, information disclosure, and financial reporting. J. Account. Econ. 36, 337–386.
Hirst, E., Koonce, L., Venkataraman, S., 2008. Management earnings forecasts: a review and framework. Account. Horiz. 22, 315–338.
Hutton, A., Lee, L., Shu, S., 2012. Do managers always know better? The relative accuracy of management and analyst forecasts. J. Account. Res. 50,
1217–1244.
Iselin, M., Van Buskirk, A., 2015. Event-specific uncertainty and its expected resolution. Working Paper.
Jones, M., Shoemaker, P., 1994. Accounting narratives: a review of empirical studies of content and readability. J. Account. Lit. 13, 142.
Jung, W., Kwon, Y., 1988. “Disclosure when the market is unsure of information endowment of managers.”. J. Account. Res. 26, 146–153.
Kim, O., Verrecchia, R., 1991. Market reaction to anticipated announcements. J. Financ. Econ. 30, 273–309.
Kothari, S.P., Leone, A., Wasley, C., 2005. Performance matched discretionary accruals measures. J. Account. Econ. 39, 163–197.
KPMG, 2011. Disclosure overload and complexity: Hidden in plain sight.
Lang, M., Stice-Lawrence, L., 2015. Textual analysis and international financial reporting: large sample evidence. J. Account. Econ. 60, 110–135.
Lang, M., Lins, K., Maffett, M., 2012. Transparency, liquidity, and valuation: international evidence on when transparency matters most. J. Account. Res. 50,
729–774.
Lawrence, A., 2013. Individual investors and financial disclosure. J. Account. Econ. 56, 130–147.
Lee, Y., 2012. The effect of quarterly report readability on information efficiency of stock prices. Contemp. Account. Res. 29, 1137–1170.
Lehavy, R., Li, F., Merkley, K., 2011. The effect of annual report readability on analyst following and the properties of their earnings forecasts. Account. Rev.
86, 1087–1115.
Lennox, C., Park, C., 2006. The informativeness of earnings and management's issuance of earnings forecasts. J. Account. Econ. 42, 439–458.
Leuz, C., Schrand, C., 2009. Disclosure and the cost of capital: Evidence from firms’ responses to the Enron shock. Working paper.
Li, F., 2008. Annual report readability, current earnings, and earnings persistence. J. Account. Econ. 45, 221–247.
Libby, R., Bloomfield, R., Nelson, M., 2002. Experimental research in financial accounting. Account., Organ. Soc. 27, 775–810.
Loughran, T., McDonald, B., 2014. Measuring readability in financial disclosures. J. Financ. 69, 1643–1671.
McNichols, M., Trueman, B., 1994. Public disclosure, private information collection, and short-term trading. J. Account. Econ. 17, 69–94.
Miller, B., 2010. The effects of financial statement complexity on small and large investor trading. Account. Rev. 85, 2107–2143.
Moffitt, K., Burns, M., 2009. What does that mean? Investigating obfuscation and readability cues as indicators of deception in fraudulent reports.
In: Proceedings of the Fifteenth Americas Conference on Information Systems, San Francisco, California.
Monga, V., Chasan, E. The 109,894-Word Annual Report Wall Str. J., 2015, Jun 2, 2015.
Petersen, M., 2009. Estimating standard errors in finance panel data sets: comparing approaches. Rev. Financ. Stud. 22, 435–480.
Riedl, E., Serafeim, G., 2011. Information risk and fair values: an examination of equity betas. J. Account. Res. 49, 1083–1122.
Roberts, M., Whited, T., 2013. Endogeneity in empirical corporate finance. Handb. Econ. Financ., 493–572.
Rogers, J., Skinner, D., Van Buskirk, A., 2009. Earnings guidance and market uncertainty. J. Account. Econ. 48, 90–109.
Shroff, N., Sun, A., White, H., Zhang, W., 2013. Voluntary disclosure and information asymmetry: evidence from the 2005 securities offering reform.
J. Account. Res. 51, 1299–1345.
Taylor, D., Verrecchia, R., 2015. Delegated trade and the pricing of public and private information. J. Account. Econ. 60, 8–32.
Verrecchia, R., 1990. Information quality and discretionary disclosure. J. Account. Econ. 12, 365–380.
Verrecchia, R., 2001. Essays on disclosure. J. Account. Econ. 32, 97–180.
Waymire, G., 1985. Earnings volatility and voluntary management forecast disclosure. J. Account. Res., 268–295.
You, H., Zhang, X., 2009. Financial statement complexity and investor underreaction to 10-K information. Rev. Account. Stud. 14, 559–586.

Guay 2016 Guiding Through The Fog Financial Statement Complexity

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Guay 2016 Guiding Through The Fog Financial Statement Complexity

Uploaded by

Copyright:

Available Formats

Journal of Accounting and Economics 62 (2016) 234–269

Contents lists available at ScienceDirect

Journal of Accounting and Economics

Guiding through the Fog: Financial statement complexity

2.1. Theory literature

2.2. Empirical literature

3.1. Financial statement complexity and voluntary disclosure

3.3. Two quasi-natural experiments

4. Sample and descriptive statistics

4.1. Sample construction

4.2. Descriptive statistics

5.1. Financial statement complexity and voluntary disclosure

W. Guay et al. / Journal of Accounting and Economics 62 (2016) 234–269

Panel A. Distribution of variables

Variable Observations Mean Std 25th Median 75th

Measures of voluntary disclosure

Measures of ﬁnancial statement complexity

W. Guay et al. / Journal of Accounting and Economics 62 (2016) 234–269

Panel A. Quintiles of ReadIndex

Variable Q1 Q2 Q3 Q4 Q5 Diff Q5–Q1 Diff p-value

VolDisc 1.27 2.26 2.86 3.30 3.40 2.13 [ o 0.01]

Panel B. Quintiles of Length

Variable Q1 Q2 Q3 Q4 Q5 Diff Q5–Q1 Diff p–value

VolDisc 0.61 1.30 2.71 4.30 4.17 3.56 [o 0.01]

Dependent variable: VolDisc

FS_Complexity ¼ ReadIndex FS_Complexity ¼ Length

Variable (1) (2) (3) (4)

FS_Complexity 0.98nnn 1.51nnn 2.90nnn 4.32nnn

ROA 3.82nnn 2.30nnn 3.56nnn 1.77nnn

Leverage –0.05 0.69nnn –0.27nn 0.33nn

MTB 0.35nn –2.33nnn 0.91nnn –1.47nnn

SpecialItems –1.73nnn –0.59nnn –1.70nnn –0.37nnn

Loss –0.48nnn –0.20nnn –0.84nnn –0.46nnn

Returns –0.29nn 0.07 –0.23nn 0.12

σReturns –0.31n –1.30nnn –0.32nn –1.30nnn

Firm Effects No Yes No Yes

5.2.1. Changes in illiquidity around the ﬁling of the 10-K

Dependent variable: VolDisc

FS_Complexity ¼ ReadIndex FS_Complexity ¼ Length

Variable (1) (2) (3) (4) (5) (6) (7) (8)

FS_Complexity x ΔIlliquidity 0.85nnn . 0.78nnn 0.73nnn 1.58nnn . 1.49nnn 1.34nnn

FS_Complexity x ΔSpread . 0.50nnn 0.34nnn 0.24n . 0.79nnn 0.50nnn 0.30nn

Controls Yes Yes Yes Yes Yes Yes Yes Yes

Dependent variable: VolDisc

FS_Complexity ¼ ReadIndex FS_Complexity ¼ Length

Variable (1) (2) (3) (4) (5) (6) (7) (8)

FS_Complexity x NAnalysts 3.40nnn . 2.61nnn 2.47nnn 6.68nnn . 5.98nnn 6.04nnn

FS_Complexity x NInstitutions . 3.29nnn 1.61nnn 1.85nnn . 5.67nnn 1.62nnn 3.61nnn

NAnalysts 2.70nnn . 2.28nnn –0.71nn 0.87nnn . 0.48nn –2.19nnn

NInstitutions . 5.84nnn 5.25nnn 5.36nnn . 3.95nnn 4.67nnn 2.62nnn

Controls Yes Yes Yes Yes Yes Yes Yes Yes

5.2.2. External monitors

5.2.3. Firm performance and earnings management

Dependent variable: VolDisc

FS_Complexity ¼ ReadIndex FS_Complexity ¼ Length

FS_Complexity x ROA 4.17nnn . . 3.94nnn 2.40nnn 4.31nnn . . 3.85nnn 3.07nnn

FS_Complexity x Loss . –1.64nnn . –1.40nnn –0.63nnn . –3.09nnn . –2.89nnn –1.80nnn

FS_Complexity x AbAcc . . –1.20nnn –1.25nnn –0.53nnn . . –2.08nnn –2.17nnn –0.92nnn

AbAcc . . 0.21n 0.25nn 0.42nnn . . 0.60nnn 0.61nnn 0.53nnn

5.3. Timing of voluntary disclosure

5.3.1. Timing of voluntary disclosure: pre-emptive voluntary disclosure

Dependent variable: PreVolDisc

FS_Complexity ¼ ReadIndex FS_Complexity ¼ Length