Comovement, financial reporting complexity, and information markets: Evidence from the effect of changes in 10-Q lengths on internet search volumes and peer correlations

Abstract

We investigate the effect of financial reporting complexity on stock comovement. We hypothesize that investors deal with complexity increases by acquiring low cost information. This information is typically informative not just about the firm of interest but also about other firms with similar fundamentals, which generates excess comovement. We find that increases in 10-Q word counts, a complexity proxy, are consistently followed by increases in 1) internet searches about the firm and 2) R 2 s from regressions between the firm's returns and its peers'. On a large scale, complexity-induced comovement might hinder investors' ability to discriminate across stocks and identify business innovators.

Are longer annual reports less readable? Evidence from foreign firms listed on the United States Stock Exchanges

“…Length of reports is one of the simplest ways in which to measure the readability of annual reports, as used by Filzen and Schutte [18], You and Zhang [11]. This measurement is identified by the number of words in such reports.…”

Information‐driven stock price comovement

“…Certain implications of the information‐driven comovement hypothesis have been tested by examining changes in the production of information (Brockman et al, 2010; Hameed et al, 2015). In a study closely related to our own, Filzen and Schutte (2017) hypothesize that investors respond to shocks in the complexity of a firm's public filings by increasing their consumption of lower cost information. Just as we observe declines in firm‐specific qualitative information consumption coincinding with higher average correlations across companies, they find individual firm stock prices exibiting stronger comovement after the complexity of their public filings increases.…”

Modelling stock correlations with expected returns from investors

“…Recently, scholars have also studied stock correlations from the perspective of investors' actions (Li et al, 2011;Eun et al, 2015;Li and Zhao, 2016;Frijns et al, 2017;Filzen and Schutte, 2017;Veldkamp, 2006;Mondria, 2010). Some empirical studies show that investors' sentiment and irrational actions will cause stock correlations (Li et al, 2011;Eun et al, 2015;Li and Zhao, 2016;Frijns et al, 2017).…”

“…Frijns et al (2017) found that stock return comvemnents were driven by the non-fundamental part of return, which was mainly the investor sentiment. Other studies focus on information dissemination through investors (Filzen and Schutte, 2017;Mondria, 2010;Veldkamp, 2006). Filzen and Schutte (2017) found that stock price would co-move when investors could acquire low cost information about other firms by empirical analysis.…”

“…Other studies focus on information dissemination through investors (Filzen and Schutte, 2017;Mondria, 2010;Veldkamp, 2006). Filzen and Schutte (2017) found that stock price would co-move when investors could acquire low cost information about other firms by empirical analysis. Mondria (2010) proved that asset prices would co-move when agents could simultaneously get the price information of the both assets to forecast asset prices through analytical analysis.…”