A financial statement obscured by fog, symbolizing complex language hiding financial performance.

Decoding Disclosure: Can Complex Language Hide Financial Performance?

Reese Marlowe in Business & Economy August 2025 • 4 min read.

"Uncover the secrets behind narrative accounting disclosures and how linguistic complexity impacts investor decisions in the stock market."

Financial statements serve as a crucial communication tool for companies, offering both quantitative and qualitative insights that, in theory, guide informed decision-making. Yet, the clarity of this communication can be compromised by the complexity of the language used, particularly in the narrative sections of accounting disclosures. Have you ever wondered if this complexity is accidental, or a deliberate tactic?

Recent research suggests that overly complex language in financial reports isn't just a matter of poor writing; it can be a strategic maneuver by managers aiming to mask underlying financial issues. This idea is rooted in what's known as the "management obfuscation hypothesis," which posits that managers may intentionally use convoluted language to obscure negative performance indicators.

This article will dissect how linguistic complexity in narrative accounting disclosures can act as a smokescreen, potentially misleading investors and affecting market perceptions. Understanding these tactics is crucial for anyone involved in financial analysis, ensuring you can see through the fog and make well-informed decisions.

The Art of Obfuscation: How Complexity Clouds Financial Truth

A financial statement obscured by fog, symbolizing complex language hiding financial performance.

The core question at stake is whether companies with struggling financial results deliberately use more complex language in their narrative disclosures. The goal? To make it harder for investors and analysts to pinpoint the issues. Several studies suggest this is indeed happening, with findings indicating an inverse relationship between a company's financial health and the readability of its reports.

Think of it like this: imagine receiving a message filled with jargon, convoluted sentences, and ambiguous phrasing. It takes longer to understand, and you might miss the key point entirely. Similarly, complex accounting disclosures increase the cost of information processing. For investors, this means more time and effort is required to extract valuable insights, potentially leading to delayed or inaccurate investment decisions.

Hiding Poor Performance: Companies may use complexity to bury bad news, making it less obvious to casual readers.
Changing Perceptions: Complex language can distract from negative outcomes, influencing how stakeholders perceive the company's situation.
Slowing Market Reaction: By making it harder to understand the true financial picture, companies might delay negative market reactions.

The study used panel data from 1,643 firm-years and an secondary sample of 1297 firm-years between 2010 and 2016 to test the correlation. To measure readability, researchers often look at factors like sentence length, word complexity, and the use of jargon. Financial performance is assessed through metrics like return on assets (ROA) and earnings per share (EPS).

Empowering Investors Through Transparency

In conclusion, the findings underscore the importance of clear and accessible financial reporting. By recognizing the potential for deliberate obfuscation, investors can become more critical readers, demanding greater transparency and simpler language. Regulators also have a role to play in promoting standardized writing practices that prevent companies from hiding behind complex disclosures. Ultimately, greater transparency benefits everyone by fostering a more informed and efficient market.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

Everything You Need To Know

What is the 'management obfuscation hypothesis' and how does it relate to narrative accounting disclosures?

The 'management obfuscation hypothesis' suggests that managers intentionally use complex language in narrative accounting disclosures to obscure negative financial performance. This hypothesis posits that companies might deliberately use convoluted language in their financial reports to make it difficult for investors and analysts to understand the underlying financial issues. This directly relates to narrative accounting disclosures, which are the qualitative sections of financial statements where companies explain their performance. The complexity in these disclosures can act as a smokescreen, potentially misleading investors about the true financial health of the company.

How does linguistic complexity in financial reports impact investor decision-making?

Linguistic complexity in financial reports significantly impacts investor decision-making by increasing the cost of information processing. When companies use complex language, it requires investors to spend more time and effort to understand the information presented. This can lead to delayed or inaccurate investment decisions, as investors may not be able to quickly identify key issues or understand the full financial picture. The use of jargon, convoluted sentences, and ambiguous phrasing obscures the key points, making it harder for investors to make informed decisions. This delay can also affect market reactions to financial news.

What are the main tactics companies use to hide their performance through complex language?

Companies use several tactics to obscure their performance using complex language. These include hiding poor performance by burying bad news, making negative outcomes less obvious to readers. Also, complex language can change investor perceptions by distracting from negative outcomes, influencing how stakeholders view the company's situation. Additionally, complex language can slow market reactions by making it harder to understand the true financial picture, potentially delaying negative market reactions.

How can investors and regulators promote greater transparency in financial reporting?

Investors can promote greater transparency by becoming more critical readers and demanding simpler language and clearer disclosures. This involves actively seeking out and questioning complex language, and looking for the key information that might be obscured. Regulators can also play a crucial role by promoting standardized writing practices. They can encourage or enforce the use of simpler language and clearer formats in financial reports. This helps to prevent companies from hiding behind complex disclosures and ensures that investors have access to understandable and reliable financial information. Ultimately, greater transparency benefits everyone by fostering a more informed and efficient market.

Can you explain the relationship between a company's financial health and the readability of its reports based on the research discussed?

The research suggests an inverse relationship between a company's financial health and the readability of its reports. Companies with struggling financial results are more likely to use complex language in their narrative disclosures. This is because complex language can make it harder for investors and analysts to pinpoint the underlying financial issues, potentially delaying or mitigating negative market reactions. The study used panel data from 1,643 firm-years and an secondary sample of 1297 firm-years between 2010 and 2016 to test the correlation. Metrics like sentence length, word complexity, and the use of jargon were used to measure readability, while return on assets (ROA) and earnings per share (EPS) were used to assess financial performance.