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) R2s 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.
This is an author-produced, peer-reviewed version of this article. © 2017, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-No Derivatives 4.0 license. Details regarding the use of this work can be found at: https://creativecommons.org/licenses/by/4.0/. The final, definitive version of this document can be found online at The North American Journal of Economics and Finance, doi: 10.1016/j.najef.2016.10.001
Filzen, Joshua J. and Schutte, Maria Gabriela. (2017). "Comovement, Financial Reporting Complexity, and Information Markets: Evidence from the Effect of Changes in 10-Q Lengths on Internet Search Volumes and Peer Correlations". The North American Journal of Economics and Finance, 39, 19-37. http://dx.doi.org/10.1016/j.najef.2016.10.001