When more is less: the adverse effect of financial reporting complexity on accounting comparability

Abstract

I investigate the impact of complex financial statements on accounting comparability. I measure accounting reporting complexity with XBRL-based measures. I find that complex financial statements reduce financial statement comparability. In addition, custom XBRL tags incrementally reduce financial statement comparability. I utilize staggered adoption of inline XBRL reporting to address endogeneity issues. I also show that the usage of custom XBRL tags is linked to data vendors’ processing difficulties as evidenced by a higher frequency of missing key variables, and that complex financial information is driving investors to adopt automated trading strategies to follow traders who have the capacity to process complicated financial information. The collective results suggest that the financial statement customization permitted by the XBRL reporting scheme may inadvertently lead to difficulties comparing firms. This study, therefore, underscores the potential consequences of complex financial reporting and provides insights into how accounting practices and regulatory frameworks can influence financial statement comparability.