Discretionary Disclosure Complexity: New Predictions and Evidence from Index Funds

46 Pages Posted: 24 Jun 2019

See all articles by Ed deHaan

Ed deHaan

University of Washington - Michael G. Foster School of Business

Yang Song

University of Washington - Michael G. Foster School of Business

Chloe Xie

Stanford University, Graduate School of Business, Students

Christina Zhu

University of Pennsylvania - The Wharton School

Date Written: June 15, 2019

Abstract

Do managers attempt to obfuscate weak performance with complex disclosures? A significant challenge in addressing this question is controlling for non-discretionary disclosure complexity driven by the underlying firm and its economic transactions. We examine the “manager obfuscation” hypothesis in the context of homogenous S&P 500 index funds. This allows us to hold non-discretionary complexity (e.g., investments and risks) largely constant in order to examine how funds’ disclosure choices covary with net performance (as measured by expenses or, equivalently, post-expense returns). We have three findings that are relevant to both the mutual fund and corporate disclosure literatures. First, funds with weaker net performance have more complex disclosures, which is compelling evidence of managerial obfuscation. Second, funds obfuscate weak performance by ex ante creating unnecessarily complex within-fund class structures. This indicates that seemingly non-discretionary firm characteristics may be part of a discretionary obfuscation strategy. Third, we find that funds simultaneously choose both their expenses and complexity, which is a departure from most studies’ assumption that managers choose disclosure complexity to obfuscate non-discretionary poor performance.

Keywords: disclosure, narrative complexity, fund fees, mutual funds

JEL Classification: G23, G18, M41, D83, D14

Suggested Citation

deHaan, Ed and Song, Yang and Xie, Chloe and Zhu, Christina, Discretionary Disclosure Complexity: New Predictions and Evidence from Index Funds (June 15, 2019). Available at SSRN: https://ssrn.com/abstract=3404563 or http://dx.doi.org/10.2139/ssrn.3404563

Ed DeHaan

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Yang Song

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Chloe Xie

Stanford University, Graduate School of Business, Students ( email )

Stanford, CA
United States

Christina Zhu (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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