Linguistic Complexity in Firm Disclosures: Obfuscation or Information?
65 Pages Posted: 8 Jan 2014 Last revised: 20 Jun 2017
Date Written: June 14, 2017
Prior research generally interprets complex language in firms’ disclosures as indicative of managerial obfuscation. However, complex language can also reflect the provision of complex information, e.g., informative technical disclosure. As a consequence, linguistic complexity commingles two latent components — obfuscation and information — that are related to information asymmetry in opposite directions. We develop a novel empirical approach to estimate these two latent components within the context of quarterly earnings conference calls. We validate our estimates of these two latent components by examining their relation to information asymmetry. Consistent with our predictions, we find that our estimate of the information component is negatively associated with information asymmetry while our estimate of the obfuscation component is positively associated with information asymmetry. Our findings suggest that future research on linguistic complexity can construct more powerful tests by separately examining these two latent components of linguistic complexity.
Keywords: Disclosure; Linguistic complexity; Conference calls; Information asymmetry
JEL Classification: D82; G14; G18; M41; M45
Suggested Citation: Suggested Citation