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

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