Limited Attention: Implications for Financial Reporting

Abstract

ABSTRACTI develop a theory to study the consequences of providing more detailed information to rationally inattentive investors. I first consider a simple data‐provision problem and show that adding more data or detail in financial statements can make it more difficult for investors to extract information. Consequently, investors who have limited information‐processing capacity may prefer less detailed information. I also show that when investors' decisions are complements, providing details in addition to a summary may reduce investors' welfare. More specifically, because of increased disclosure of details, a coordination failure could occur in investors' attention‐allocation decisions. By showing that adding more detail in financial statements can lead to an information overload problem for investors, this study yields valuable insights for accounting standard setters.