Linguistic Complexity in Firm Disclosures: Obfuscation or Information?

65 Pages Posted: 8 Jan 2014 Last revised: 20 Jun 2017

See all articles by Brian J. Bushee

Brian J. Bushee

University of Pennsylvania - The Wharton School

Ian D. Gow

University of Melbourne

Daniel J. Taylor

Wharton School, University of Pennsylvania

Multiple version iconThere are 2 versions of this paper

Date Written: June 14, 2017

Abstract

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

Bushee, Brian J. and Gow, Ian D. and Taylor, Daniel, Linguistic Complexity in Firm Disclosures: Obfuscation or Information? (June 14, 2017). Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2375424 or http://dx.doi.org/10.2139/ssrn.2375424

Brian J. Bushee

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-4872 (Phone)
215-573-2054 (Fax)

Ian D. Gow

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

Daniel Taylor (Contact Author)

Wharton School, University of Pennsylvania ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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