Economic Policy Uncertainty and Accounting Reporting Complexity

Abstract

We posit that accounting reporting complexity includes two components—monetary reporting complexity (MRC) and textual reporting complexity (TRC). It is generally challenging to disentangle these components because they tend to increase with real business activities. Economic policy uncertainty (EPU) provides an ideal setting to overcome this challenge. Greater EPU reduces real business activities, suggesting a reduction in MRC. However, TRC can increase or decrease depending on disclosure incentives. Using monetary and textual eXtensible Business Reporting Language (XBRL) tags to measure MRC and TRC, respectively, we find that high EPU reduces MRC but increases TRC. These findings survive a series of robustness checks. Additional analyses show that [1] these relationships hold for all ten policy categories; [2] the reduction in five hard-to-reverse business activities drives the reduction in MRC; [3] the decrease in MRC drives the increase in TRC; [4] the simultaneous changes in MRC and TRC help reduce the increase in information asymmetry due to high EPU; and [5] these relationships are stronger for firms relying more on the government for their operations and weaker for firms with high political risk or proprietary risk. Collectively, these results suggest that, when facing greater uncertainty about future economic policies, firms tend to delay real economic activities and justify this reduction using textual disclosure. Our study makes several contributions to research on economic policy uncertainty and accounting reporting complexity.