Discretionary Disclosure Complexity: New Predictions and Evidence from Index Funds
46 Pages Posted: 24 Jun 2019
Date Written: June 15, 2019
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: Suggested Citation