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Reporting Complexity

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Submitted By swat713
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Importance Perspective
We found the research itself on the effects of reporting complexity rather interesting as regulators continuously attempt to reach a state of equality between both small and large investors. While the SEC has assisted in granting electronic access to financial information for small investors, it kind of seems counterintuitive that many small investors receive a minimal benefit as report complexity has continued to increase which in most cases lead to higher processing costs.

Arthur Levitt, former SEC chairman has said that “In many cases, the problem is not a lack of information; it is actually quite the opposite. To much information can be as much of a problem as to little and more disclosure does not always mean better disclosure.”

More information and disclosure, especially to small investors is seen as a negative attribute as it once again comes back to higher processing costs from resources they do not have. This makes it rather difficult for small investors to make an informed investment decision surrounding the filing date of a company’s 10-k.

Hypotheses
Brian Miller derived two hypotheses, with one consisting of an A & B format surrounding the effects of reporting complexity on small and large investors in order to guide his research.

The first hypothesis H1(a) is Total abnormal trading around a 10-K is lower when reports are more complex. Mr. Miller stated that if reports become complex (based on the length & readability), forecasting the profitability and sustainability of future growth from these reports becomes difficult. Investors in this case may simply choose not to invest in companies that produce such complex 10-k reports, which would ultimately lead to a lower abnormal trading volume.

H1(b) states that The effects of report complexity on abnormal trading are most pronounced among small investors. In this hypothesis, the author seeks to examine the behavioral differences between the classes of investors on reporting complexity. While large investors may not be immune to reporting complexity, they possess the additional resources and technology to make an informed decision that smaller investors would end up avoiding.

Lastly H2 says Trading consensus within a class of investors is lower when 10-K reports are more complex. Basically, the author believes there is a higher level of disagreement within investor groups when the 10-k reports are more complex. This would result in more buyer and seller initiated trades offsetting as opposed to investors trading in the same direction. The author also claims that trading consensus is even lower for small investors compared to large ones.

Now Dave will go over the Research Design and Sample Selection

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