The complexity yield puzzle: A textual analysis of municipal bond disclosures

We study the effect of official statement textual complexity on municipal borrowing costs (yield) through the clientele channel. Theoretically, complexity reduces signal quality for unsophisticated investors, potentially increasing yield. We provide causal evidence of an economically significant complexity-yield premium that is especially large for issues with greater tax-induced exogenous demand from unsophisticated investors or less complementary information from rating agencies. We decompose complexity into multiple topics and find that "legal complexity" matters most for the complexityyield premium. Despite this premium, complexity has been trending upward across all credit categories. This trend is attributable to increased regulatory enforcement from the SEC.