The Impact Of Annual Report Complexity On The Risk Of Stock Crash

The complexity of corporate information disclosure increases the cost of processing company-specific information for investors and affects their understanding and judgment of company information,leading to many adverse economic consequences,so regulators usually have "clear and simple" requirements for corporate disclosure.From the perspective of agency theory,a poor corporate information environment and the concealment of bad news by company managers for self-interest can often lead to an extremely bad economic outcome such as a stock price crash.When the accumulated negative news reaches a certain level,managers may not be able to continue to hide it,so that the accumulated negative news will be released to the public,which will have a greater impact on investors and lead to the risk of a company’s stock crash.Studies have shown that poor corporate information environment and company management’s concealment of bad news are important causes of stock crash,while the complex information content of annual reports often provides room for manipulation by company managers to conceal negative news,thus suggesting that the complexity of annual reports may also be an important potential determinant of a company’s stock crash.Then,the current research results on the impact of corporate disclosure complexity and stock crash risk in China are not very abundant.First,from the perspective of annual report complexity indicators,the current indicators for measuring complexity are often based on the measurement of text length,without distinguishing whether the increase in the length of information content is due to the repetition of redundant information or to the already rich amount of information that the company itself needs to disclose.In view of this,this paper proposes a new complexity measure of annual reports of listed companies based on text compression rate,and then validates the proposed new complexity measure by its impact on the company’s earnings persistence.Second,in terms of the relationship between the two,this paper further investigates the relationship between the complexity of corporate annual reports and the risk of future stock crash by using the new complexity measure(compression ratio)to distinguish the information of text manipulation by managers,in order to determine whether the complexity of corporate annual reports is a potential determinant.The results of the study find that(1)the compression ratio is reliable as a measure of annual report text information complexity and can effectively distinguish between rich and redundant information in the content of annual reports;(2)the complexity of annual reports is caused by repetitive and redundant information,which is a means for managers to strategically manipulate annual report text information;(3)the more complex the annual report text information is,the more profitable companies’ earnings persistence(3)the more complex the textual information in the annual report,the worse the earnings persistence of profitable frim and the better the earnings persistence of loss frim;(4)the more complex the annual report,the higher the risk of stock crash of the company.