The Opposing Eﬀects of Complexity and Information Content on Uncertainty Dynamics: Evidence from 10-K Filings
48 Pages Posted: 9 Dec 2014 Last revised: 7 Jul 2021
Date Written: July 6, 2021
We evaluate the impact of complexity and information content of 10-K ﬁlings on investors’ perceived uncertainty dynamics following the ﬁlings. On average, the option implied volatility increases in the ﬁrst four weeks after the ﬁlings, followed by a net decrease in the subsequent six weeks. This hump-shaped volatility dynamics is more pronounced for ﬁrms with larger 10-K ﬁle sizes. We provide a novel decomposition of 10-K ﬁle size based on the individual sections’ disclosure amount and topic analysis. We ﬁnd that the discussions on topics in the Risk Factors section mainly capture the complexity aspect whereas the discussions on topics in the Managerial Discussion and Analysis (MD&A) section mainly capture the information content aspect of the 10-K ﬁlings. Economically, an options-based investment strategy exploring the volatility dynamics generates up to 17% annualized return spread. Our ﬁndings highlight the importance of the timing for understanding the opposing eﬀects of complexity and information content on asset prices.
Keywords: Learning; Complexity; Information; Volatility dynamics
JEL Classification: G14; D82; D83; M41
Suggested Citation: Suggested Citation