We quantify the semantic complexity of firms' financial disclosures by capturing the connotation-altering impact of 'valence shifters,' which include adjectives (e.g., 'tiny'), adverbs (e.g., 'barely'), negators (e.g., 'cannot'), and adversative conjunctions (e.g., 'but,' `although') that significantly modify the interpretation of sentences. The semantic complexity index (SCI) of a disclosure is defined as the proportion of sentences in the text containing at least one valence shifter. We show that an increase in disclosures' semantic complexity corresponds to significantly higher post-filing return volatility, indicating increased uncertainty among market participants. Our metric also renders most other competing measures insignificant in its presence. We also examine the effect of the Plain Writing Act of 2010 on the semantic complexity of disclosures and find that firms with the most complex disclosures prior to the Act significantly reduce their complexity after the Act.
We quantify the semantic complexity of firms' financial disclosures by capturing the connotation-altering impact of 'valence shifters,' which include adjectives (e.g., 'tiny'), adverbs (e.g., 'barely'), negators (e.g., 'cannot'), and adversative conjunctions (e.g., 'but,' `although') that significantly modify the interpretation of sentences. The semantic complexity index (SCI) of a disclosure is defined as the proportion of sentences in the text containing at least one valence shifter. We show that an increase in disclosures' semantic complexity corresponds to significantly higher post-filing return volatility, indicating increased uncertainty among market participants. Our metric also renders most other competing measures insignificant in its presence. We also examine the effect of the Plain Writing Act of 2010 on the semantic complexity of disclosures and find that firms with the most complex disclosures prior to the Act significantly reduce their complexity after the Act.
