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

See all articles by Joon Woo Bae

Joon Woo Bae

Case Western Reserve University - Weatherhead School of Management

Frederico Belo

INSEAD; Centre for Economic Policy Research (CEPR)

Jun Li

University of Texas at Dallas

Xiaoji Lin

University of Minnesota

Xiaofei Zhao

Georgetown University - Robert Emmett McDonough School of Business

Date Written: July 6, 2021

Abstract

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

Bae, Joon Woo and Belo, Frederico and Li, Jun and Lin, Xiaoji and Zhao, Xiaofei, The Opposing Effects of Complexity and Information Content on Uncertainty Dynamics: Evidence from 10-K Filings (July 6, 2021). Available at SSRN: https://ssrn.com/abstract=2535469 or http://dx.doi.org/10.2139/ssrn.2535469

Joon Woo Bae

Case Western Reserve University - Weatherhead School of Management ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States

Frederico Belo

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Jun Li (Contact Author)

University of Texas at Dallas ( email )

800 West Campbell Road, SM 31
Richardson, TX 75080
United States
972-883-4422 (Phone)

Xiaoji Lin

University of Minnesota ( email )

420 Delaware St. SE
Minneapolis, MN 55455
United States

Xiaofei Zhao

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

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