Accounting Reporting Complexity as a Source of Insider Information Advantage: Evidence from Insider Trades

53 Pages Posted: 14 Jul 2021 Last revised: 22 Dec 2023

See all articles by Scott Duellman

Scott Duellman

Saint Louis University - Department of Accounting

J. Philipp Klaus

University of Texas at Arlington - Department of Accounting

Blair B. Marquardt

University of North Texas - Department of Accounting

Date Written: December 19, 2023

Abstract

Accounting reporting complexity (ARC) represents the overall difficulty in preparing and consuming financial statements and is of growing concern to regulators and capital market stakeholders. While financial statements serve to mitigate information asymmetry between preparers and users, complexity can hinder their effectiveness. We address this issue by examining insider trading profits conditional on ARC. Consistent with ARC producing an information advantage to insiders, we document higher returns to executives on the trades executed in the 60 days after the report filing as ARC increases. We find that the most financially sophisticated and informed insiders, the CEO and CFO, appear to adjust their trading activity accordingly. Furthermore, high ARC firms have a weaker correlation between current and future earnings, a weaker earnings response coefficient, and a longer return drift. Collectively, the results suggest that ARC impairs the informativeness of financial reports to market participants, exacerbating the information gap between insiders and other stakeholders. Our findings demonstrate how insiders can use the complexity of financial reporting to their advantage, as they face few trading constraints during the post-filing period.

Keywords: Accounting reporting complexity, information asymmetry, insider trading

JEL Classification: G14, M41

Suggested Citation

Duellman, Scott and Klaus, Jan Philipp and Marquardt, Blair, Accounting Reporting Complexity as a Source of Insider Information Advantage: Evidence from Insider Trades (December 19, 2023). Available at SSRN: https://ssrn.com/abstract=3873474 or http://dx.doi.org/10.2139/ssrn.3873474

Scott Duellman

Saint Louis University - Department of Accounting ( email )

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

Jan Philipp Klaus

University of Texas at Arlington - Department of Accounting ( email )

Arlington, TX 76019
United States

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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