Strategic Complexity in Disclosure

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.