Accounting Reporting Complexity as a Source of Insider Information Advantage: Evidence From Insider Trades

Accounting reporting complexity (ARC) represents the overall difficulty in preparing and consuming the financial statements and is of growing concern to regulators and capital market stakeholders. Although financial statements serve to mitigate information asymmetry between preparers and users, complexity can hinder their effectiveness. We contribute to the evidence on this issue by examining insider trading profits conditional on ARC. Consistent with ARC producing an information advantage to insiders, we document higher returns to executives on the trades executed in the 60 days after the report filing as ARC increases. The most financially sophisticated and informed insiders, the CEO and CFO, appear to adjust their trading activity accordingly. Furthermore, high ARC firms have a weaker correlation between current and future earnings, a weaker earnings response coefficient, and a longer return drift. Collectively, the results document a novel and material cost of ARC. ARC impairs the informativeness of financial reports to market participants, exacerbating the information gap between insiders and other stakeholders. Insiders can use this to their advantage, as they face few trading constraints during the post-filing period.