Do Sell-Side Analysts’ Qualifications Mitigate the Adverse Effects of Accounting Reporting Complexity?
60 Pages Posted: 26 Apr 2017 Last revised: 29 Nov 2018
Date Written: May 25, 2018
While there is broad recognition that the financial reports are overly complex, regulators acknowledge that there is no solution in sight (FASB 2017). Complexity introduces challenges in collecting, interpreting, and analyzing information for investment decisions. Analysts are sophisticated intermediaries who can potentially alleviate the adverse effects of complexity (FASB 2010). It is unclear, however, whether analysts are also challenged by complexity. Addressing this question, we find that accounting reporting complexity (ARC) is associated with lower analysts’ performance. Further, we find that this association is driven by the complexity of the disclosed information in the footnotes, rather than the seemingly more important accounting information that is recognized on the face of the financial statements. Next, we find that while analysts’ general experience does not help alleviate complexity, analysts’ firm-specific experience, industry focus, and CFA certification do. Using a new approach for measuring analysts’ account-specific expertise we find that expertise in fair value, derivatives and pension accounts is more valuable than other types of qualifications in attenuating the negative effects of complexity in these accounts. Overall, this study underscores the importance of analysts’ qualifications and the need to simplify the disclosures in the notes to the financial statements.
Keywords: XBRL, accounting complexity, financial analysts’ performance, financial analysts’ expertise
JEL Classification: G24, G29, M41
Suggested Citation: Suggested Citation