Financial Disclosure under Regulatory Fragmentation

40 Pages Posted: 16 Apr 2024

See all articles by Jonathan Kalodimos

Jonathan Kalodimos

Oregon State University - College of Business

Date Written: April 5, 2024

Abstract

Regulatory fragmentation occurs when multiple regulatory bodies promulgate overlapping regulations. This overlap creates inconsistencies, inefficiencies, and unclear objectives but also results in enhanced domain specific scrutiny. Empirically, I find that regulatory fragmentation is associated with an increase in the discussion of uncertainty, litigation, and overall negativity in financial disclosures. In response to the heightened uncertainty, I find that firms adjust by improving their financial statement readability (text) and reducing accounting complexity (numerical intensity), which is consistent with the informativeness view of financial reporting. The net downstream effect of compensatory mechanisms in financial disclosure is that regulatory fragmentation is associated with more accurate earnings forecasts by analysts with less dispersion. Further, investors perceive less information asymmetry risk (tighter bid-ask spreads) and disagreement (lower turnover) at the time of earnings announcement.

Keywords: Regulatory fragmentation, financial disclosure readability, accounting reporting complexity, analyst accuracy

JEL Classification: G18, G38, H11, K22, M41, M48

Suggested Citation

Kalodimos, Jonathan, Financial Disclosure under Regulatory Fragmentation (April 5, 2024). Available at SSRN: https://ssrn.com/abstract=4785824 or http://dx.doi.org/10.2139/ssrn.4785824

Jonathan Kalodimos (Contact Author)

Oregon State University - College of Business ( email )

Corvallis, OR 97331
United States

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