Guiding Through the Fog: Financial Statement Complexity and Voluntary Disclosure

80 Pages Posted: 14 Feb 2015 Last revised: 27 Oct 2016

Wayne R. Guay

University of Pennsylvania - Accounting Department

Delphine Samuels

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA)

Daniel J. Taylor

University of Pennsylvania - The Wharton School

Date Written: September 29, 2016

Abstract

A growing literature documents that complex financial statements negatively affect the information environment. In this paper, we examine whether managers use voluntary disclosure to mitigate these negative effects. Employing cross-sectional and within-firm designs, we find a robust positive relation between financial statement complexity and voluntary disclosure. This relation is stronger when liquidity decreases around the filing of the financial statements, is stronger when firms have more outside monitors, and is weaker when firms have poor performance and greater earnings management. We also examine the relation between financial statement complexity and voluntary disclosure using two quasi-natural experiments. Employing a generalized difference-in-differences design, we find firms affected by the adoption of complex accounting standards (e.g., SFAS 133 and SFAS 157) increase their voluntary disclosure to a greater extent than unaffected firms. Collectively, these findings suggest managers use voluntary disclosure to mitigate the negative effects of complex financial statements on the information environment.

Keywords: financial statement complexity, voluntary disclosure, information environment

JEL Classification: D82, D83, G14, M41, M45

Suggested Citation

Guay, Wayne R. and Samuels, Delphine and Taylor, Daniel, Guiding Through the Fog: Financial Statement Complexity and Voluntary Disclosure (September 29, 2016). Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2564350 or http://dx.doi.org/10.2139/ssrn.2564350

Wayne R. Guay

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
1329 Steinberg-Dietrich Hall
Philadelphia, PA 19104-6365
United States
215-898-7775 (Phone)
215-573-2054 (Fax)

Delphine Samuels

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA) ( email )

77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States

Daniel Taylor (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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