Changing the Channel: The Relation between Information Complexity and Disclosure Channel Richness

Abstract

I examine the role of information complexity in disclosure channel choice and the implications of the channel decision for market participants. Organizational communication theory suggests that managers who prefer efficient communication match underlying information complexity to internal communication channel richness (e.g. interaction, language variety and cues). Although external disclosures diverge from internal firm communication in important ways, I find evidence consistent with the management theory in the external quarterly reporting setting. Specifically, I find information complexity is associated with the allocation of information across channels with differing richness (e.g. earnings press release and conference call). The positive relation between complexity and richness is mitigated when managers have weakened preferences for (or ability to facilitate) communication efficiency. Moreover, placing complex information in channels with insufficient cues is associated with slower price formation. The results are consistent with managers, on average, choosing disclosure channels to reduce investors’ processing costs.

Keywords: Voluntary disclosure, disclosure channel, managerial incentives, price efficiency

JEL Classification: G14, M41