10K Complexity and the Market Efficiency and Information Asymmetry Implications of Analysts’ Annual Earnings Forecasts

Abstract

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 find 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 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.

Keywords: 10K complexity, information asymmetry, analyst forecasts, market efficiency

JEL Classification: d52, d82, g12, g14, m40, m41,