The Opposing Effects of Complexity and Information Content on Uncertainty Dynamics: Evidence from 10-K Filings

Management Science

43 Pages Posted: 9 Dec 2014 Last revised: 28 Mar 2022

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 - McDonough School of Business

Date Written: March 21, 2022

Abstract

We evaluate the impact of complexity and information content of 10-K filings on uncertainty dynamics following the filings. We have three main findings. First, the option implied volatility on average increases in the first four weeks after the filings, followed by a net decrease in the subsequent six weeks. Second, this hump-shaped volatility dynamics is more pronounced for firms with larger 10-K file sizes. Third, we provide a novel decomposition of 10-K file size based on the individual sections' disclosure amount and topic analysis, and 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. 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; Textual analysis

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 (March 21, 2022). Management Science, 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 - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

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