10-K Complexity, Analysts’ Forecasts, and Price Discovery in Capital Markets​

This paper examines whether 10K complexity has unintended consequences in terms of impairing price discovery in capital markets. More specifically, we examine the impact -- on information asymmetry and market efficiency -- of sell-side financial analysts’ first revised forecasts following publication of high- versus low-complexity 10Ks. We hypothesize that: (1) the generally mitigating effect of analysts’ forecasts on information asymmetry documented in prior literature dissipates with 10K complexity; (2) analyst underreaction to 10K-related information increases with complexity; and (3) the impact of analyst underreaction on stock price efficiency increases with 10K complexity. Our results are consistent with these hypotheses. Together, our results suggest that analyst forecasting behavior in response to complex 10K-related information constrains price discovery by creating market frictions due to information asymmetry and market inefficiency.

Professor Phil Shane

Professor Philip B. Shane is KPMG Professor Emeritus at the College of William and Mary and Professor of Accounting at Monash University. Shane's research focuses primarily on the role of financial analysts in the interpretation of accounting information for resource allocation in capital markets. Shane has presented his research at national and international conferences and has published his research in leading journals including The Accounting Review, Journal of Accounting Research, Journal of Accounting and Economics, and Contemporary Accounting Research. He is a past president of the Financial Accounting and Reporting Section of the American Accounting Association and a past Academic Fellow of the Financial Accounting Standards Board.

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