The Decision Usefulness of Accounting Reporting Complexity: Evidence from Filing Returns and Insider Trades

58 Pages Posted: 14 Jul 2021 Last revised: 30 Sep 2022

See all articles by Hyun Woong Chang

Hyun Woong Chang

University of North Texas

Scott Duellman

Saint Louis University - Department of Accounting

J. Philipp Klaus

Bentley University

Blair B. Marquardt

University of North Texas - Department of Accounting

Date Written: September 30, 2022

Abstract

Standard setters have expressed concern about the impact of complex accounting standards on the information gap between firm insiders and financial statement users. We address this issue by examining the relation between accounting reporting complexity (ARC) and the market response to earnings surprises at the financial report filing. We document a weaker earnings response coefficient for increasing ARC, consistent with less market reliance on complex financial reports. The lower reaction to complex information provides a window of residual information asymmetry for insiders to exploit. Consistent with an information advantage to insiders, we document higher returns to executives on the trades executed in the 60 days following the report filing as ARC increases. Finally, we identify a negative relation between ARC and earnings persistence as an underlying mechanism for these effects. Collectively, the results suggest that ARC impairs the predictive value of financial reports to market participants, exacerbating the information gap between insiders and outsiders.

Keywords: Accounting reporting complexity, information asymmetry, earnings response coefficient, insider trading, earnings persistence

JEL Classification: G14, M41

Suggested Citation

Chang, Hyun Woong and Duellman, Scott and Klaus, Jan Philipp and Marquardt, Blair, The Decision Usefulness of Accounting Reporting Complexity: Evidence from Filing Returns and Insider Trades (September 30, 2022). Available at SSRN: https://ssrn.com/abstract=3873474 or http://dx.doi.org/10.2139/ssrn.3873474

Hyun Woong Chang

University of North Texas ( email )

1155 Union Circle #305340
Denton, TX 76203
United States

Scott Duellman

Saint Louis University - Department of Accounting ( email )

3674 Lindell Blvd.
St. Louis, MO 63108
United States

Jan Philipp Klaus

Bentley University ( email )

175 Forest Street
Waltham, MA 02452
United States

HOME PAGE: http://https://faculty.bentley.edu/details.asp?uname=pklaus

Blair Marquardt (Contact Author)

University of North Texas - Department of Accounting ( email )

G. Brint Ryan College of Business
1155 Union Circle #305219
Denton, TX 76203-5017
United States

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