Do Sell-Side Analysts’ Qualifications Mitigate the Adverse Effects of Accounting Reporting Complexity?
57 Pages Posted: 26 Apr 2017 Last revised: 30 Jan 2019
Date Written: January 2019
This study examines whether analysts’ qualifications, experience, and expertise in specific accounting areas help them mitigate the challenges they face while interpreting complex financial reports. We take advantage of eXtensible Business Reporting Language (XBRL) filings to construct complexity measures of the recognized vs. disclosed accounting information, as well as the complexity of fair value, derivatives, and pensions disclosures. Without XBRL, constructing such measures is less feasible. We find that the negative association between accounting reporting complexity and analysts’ performance is primarily driven by the complexity of the information disclosed in the financial statement notes, rather than the information that is recognized on the face of the financial statements. We further find that while analysts’ general experience does not help alleviate complexity, analysts’ firm-specific experience, industry focus, and CFA certification do. Using an XBRL-based approach, we propose new measures of analysts’ account-specific expertise and 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 inherently complex 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