10K Complexity and the Market Efficiency and Information Asymmetry Implications of Analysts’ Annual Earnings Forecasts

50 Pages Posted: 11 Mar 2019

See all articles by Jamie Diaz

Jamie Diaz

College of William and Mary

Kenneth Njoroge

College of William and Mary - Mason School of Business

Philip B. Shane

College of William & Mary; Monash University; Monash University - Department of Accounting

Date Written: February 19, 2019

Abstract

This paper examines whether 10K complexity has unintended consequences in terms of impairing price discovery in capital markets. More specifically, we examine the impact -- on market efficiency and information asymmetry -- of sell-side financial analysts’ first revised forecasts following publication of high- versus low-complexity 10Ks. We hypothesize that: (1) analyst underreaction to 10K-related information increases with complexity, (2) the impact of analyst underreaction on stock price efficiency increases with 10K complexity, and (3) the generally mitigating effect of analysts’ forecasts on information asymmetry documented in prior literature dissipates with 10K complexity. Our results are consistent with these hypotheses. Together, our results suggest that analyst forecasting behavior in response to complex 10K-related information constrains price discovery by creating market frictions due to market inefficiency and information asymmetry.

Suggested Citation

Diaz, Jamie and Njoroge, Kenneth and Shane, Philip B., 10K Complexity and the Market Efficiency and Information Asymmetry Implications of Analysts’ Annual Earnings Forecasts (February 19, 2019). Available at SSRN: https://ssrn.com/abstract=3337793 or http://dx.doi.org/10.2139/ssrn.3337793

Jamie Diaz

College of William and Mary ( email )

P.O. Box 8795
Williamsburg, VA 23185
United States
7572212932 (Phone)

Kenneth Njoroge

College of William and Mary - Mason School of Business ( email )

P.O. Box 8795
Williamsburg, VA 23187-8795
United States

Philip B. Shane (Contact Author)

College of William & Mary ( email )

P.O. Box 8795
Williamsburg, VA 23185
United States

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Monash University - Department of Accounting ( email )

H3.43, Building H, Level 3
Monash University Caulfiled
Melbourne, VIC 3145
Australia

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