Organization Complexity, Financial Reporting Complexity, and Firms’ Information Environment

This study examines how organization complexity influences financial reporting complexity (FRC) and information environment. The results suggest that the positive association between organization complexity and FRC is much more nuanced than portrayed in the literature. An organizationally complex firm files an annual financial report containing longer textual disclosures and shorter financial statements. However, it provides more firm-specific supplementary data in the footnotes. These patterns suggest that FRC is partly attributable to managers’ reporting choices to optimize the disclosure of their complex operations and performance to outsiders. While organization complexity and FRC are related, each incrementally explains the firm’s information environment (direct effect). Finally, although organization complexity increases voluntary disclosure via its impact on FRC, the magnitude of this indirect effect is minor relative to that of its direct effect. These findings collectively suggest that FRC does not capture the same aspect of firm complexity that arises from organization complexity, and organizationally complex firms are more likely to use voluntary disclosure to supplement their financial reports