An investor navigates a maze of financial statements, representing the challenge of understanding complex disclosures.

Decoding Disclosure: How Narrative Complexity Impacts Your Investments

Lena Voss in Business & Economy August 2025 • 4 min read.

"Unraveling the linguistic maze of financial statements to protect your portfolio."

Financial statements are the primary way companies communicate with investors, offering both quantitative data and qualitative explanations. Ideally, these disclosures should provide a clear picture, aiding informed decision-making. However, the language used in these narratives can be complex, sometimes intentionally so, obscuring vital information and making it harder for investors to understand a company's true financial health.

This article delves into the challenges posed by complex narrative accounting disclosures. We will explore how companies might use complicated language to mask negative performance, a practice known as 'management obfuscation.' Understanding these tactics is crucial for investors looking to make sound judgments and protect their investments.

Think of this as your guide to cutting through the corporate jargon. We’ll break down the research, reveal the key findings, and provide actionable insights to help you navigate the world of financial disclosures with confidence.

The Obfuscation Game: Hiding Behind Complexity

An investor navigates a maze of financial statements, representing the challenge of understanding complex disclosures.

The central idea we're exploring is that companies sometimes make their financial disclosures deliberately hard to understand. Why? To hide negative information, particularly when the company isn't doing well. This strategy, termed the 'management obfuscation hypothesis,' suggests that complex language serves as a smokescreen, slowing down market reactions and potentially misleading investors.

Several studies support this idea, showing a negative correlation between a company's financial performance and the complexity of its disclosures. In other words, the worse a company's earnings, the more convoluted its financial reports tend to be. This isn't just about unintentional jargon; it's about strategically using language to create confusion.

Readability Matters: Studies show that firms with lower earnings tend to have less intelligible annual reports.
Investor Impact: Complex language increases the cost of information processing, making it harder for investors to accurately assess a company.
Global Phenomenon: Research indicates this practice isn't limited to English-speaking countries; it can be found in various markets.

One recent study examined this phenomenon in the Brazilian stock market, a setting characterized by concentrated ownership and potentially weaker legal protections for minority shareholders. The researchers found that companies with poorer performance indeed tended to have more complex narrative disclosures. This suggests that management obfuscation may be a deliberate tactic, especially in environments where it's easier to get away with.

Protecting Yourself: Strategies for Savvy Investors

So, what can you do to navigate this landscape of potentially misleading disclosures? The key is to be aware of the possibility of obfuscation and to take steps to ensure you're getting a clear picture of a company's financial health. Demand transparency, diversify your sources, and seek expert advice. By staying vigilant and informed, you can minimize the risk of being misled by complex narratives and make more confident investment decisions. Don't let corporate jargon cloud your judgment; empower yourself with knowledge and critical thinking.

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.

This article is based on research published under:

DOI-LINK: 10.1016/j.ribaf.2018.12.008, Alternate LINK

Title: The Linguistic Complexities Of Narrative Accounting Disclosure On Financial Statements: An Analysis Based On Readability Characteristics

Subject: Finance

Journal: Research in International Business and Finance

Publisher: Elsevier BV

Authors: João Antônio Salvador De Souza, Jean Carlo Rissatti, Suliani Rover, José Alonso Borba

Published: 2019-04-01

Everything You Need To Know

What is the primary idea behind why some companies use complex language in their financial statements?

The central idea is that some companies intentionally make their financial disclosures difficult to understand, especially when they are underperforming. This is referred to as the 'management obfuscation hypothesis'. They do this to conceal negative information and slow down market reactions, potentially misleading investors about the company's true financial health. It's about strategically using complex language to create confusion.

What does research suggest about the correlation between a company's financial performance and the complexity of its disclosures?

Studies indicate a negative correlation between a company's financial performance and the complexity of its disclosures. Firms with lower earnings tend to have less intelligible annual reports. This complexity increases the cost of information processing for investors, making it harder for them to accurately assess a company. This practice isn't limited to English-speaking countries; it has been observed in various markets.

What steps can investors take to protect themselves from potentially misleading financial disclosures?

As an investor, you can demand transparency from companies, diversify your sources of information, and seek expert advice to ensure you are getting a clear picture of a company's financial health. Being aware of the potential for 'management obfuscation' and employing critical thinking can help you make more informed investment decisions.

Can you provide an example of a specific market where 'management obfuscation' has been observed and what does it suggest?

One recent study examined the Brazilian stock market, which is characterized by concentrated ownership and potentially weaker legal protections for minority shareholders. The researchers found that companies with poorer performance tended to have more complex narrative disclosures. This suggests that 'management obfuscation' may be a deliberate tactic, especially in environments where it's easier to get away with, due to less stringent regulatory oversight.

What are the broader implications of the 'management obfuscation hypothesis' for investors and the financial markets?

The implications of the 'management obfuscation hypothesis' are that investors need to be wary of overly complex financial disclosures. If companies are intentionally using complex language to obscure negative information, it can lead to misinformed investment decisions. Investors should be vigilant, seek transparency, and consider consulting experts to ensure they fully understand a company's financial health. Ignoring this practice could lead to financial losses if investment decisions are based on misleading information.