Managerial Ability and Financial Report Complexity

We investigate whether and how managerial ability affects financial report complexity. After controlling for a host of firm characteristics such as firms’ financial and operating complexity, we find that managerial ability is significantly and positively related to the complexity of financial reports. We also find that the effect is more pronounced in firms that are more likely to benefit from protecting proprietary information while controlling for option holdings of the manager, the extent of insider trading, corporate governance, and institutional ownership. Collectively, the results are consistent with the notion that high-ability managers strategically increase financial report complexity to protect firms’ proprietary information rather than extract personal benefits