Strategic Complexity in Disclosure

53 Pages Posted: 5 Oct 2021

See all articles by Cyrus Aghamolla

Cyrus Aghamolla

University of Minnesota - Twin Cities

Kevin Smith

Stanford University Graduate School of Business

Date Written: October 5, 2021


Extensive evidence suggests that managers strategically choose the complexity of their descriptive disclosures. However, their motives in doing so appear mixed, as complex disclosures are used to obfuscate in some cases and as a means of informative communication in others. Building on these observations, we first identify a novel stylized fact: disclosure complexity is non-monotonic in firm performance. We then develop a model of disclosure complexity that incorporates the dual roles of complexity and can explain this stylized fact. In the model, a manager discloses to investors of heterogeneous sophistication and can adjust the complexity of the disclosure to either provide more precise information or to obfuscate. In equilibrium, the manager issues a complex disclosure upon observing both highly positive and negative news. The average market reaction to complex disclosures may exceed that to simple disclosures, which is at odds with the conventional wisdom that negative news is more often complexified. We further demonstrate a policy solution to mitigate the harmful effects of obfuscation on the information environment: mandate that firms accompany complex disclosures with simplified reports.

Keywords: Financial reporting complexity, disclosure, complexity, obfuscation, disclosure informativeness, sophisticated investors, MD&A

JEL Classification: C72, D82, D83, G14, M41

Suggested Citation

Aghamolla, Cyrus and Smith, Kevin, Strategic Complexity in Disclosure (October 5, 2021). Available at SSRN: or

Cyrus Aghamolla (Contact Author)

University of Minnesota - Twin Cities ( email )

420 Delaware St. SE
Minneapolis, MN 55455
United States

Kevin Smith

Stanford University Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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