Linguistic Complexity in Firm Disclosures: Obfuscation or Information?

Abstract

Prior research generally interprets complex language in firms’ disclosures as indicative of managerial obfuscation. However, complex language can also reflect the provision of complex information, e.g., informative technical disclosure. As a consequence, linguistic complexity commingles two latent components — obfuscation and information — that are related to information asymmetry in opposite directions. We develop a novel empirical approach to estimate these two latent components within the context of quarterly earnings conference calls. We validate our estimates of these two latent components by examining their relation to information asymmetry following the call. Consistent with our predictions, we find that our estimate of the information component of managerial linguistic complexity is negatively associated with information asymmetry and our estimate of the obfuscation component is positively associated with information asymmetry. Our findings suggest that future research on linguistic complexity can construct more powerful tests by separately examining these two latent components of linguistic complexity.