| Abstract: |
Business complexity is an important informational friction but challenging to measure. We use a GPT large language model fine-tuned on narrative disclosures and inline XBRL tags to measure business complexity from a user perspective. Our measure negatively correlates with the speed of capital market price adjustments to financial reports and positively correlates with filing delays even after controlling for existing complexity measures. We exploit the modularity offered by the measure to construct complexity scores for different transaction categories, such as debt, business combinations, and compensation. Using this modular measure, we find that more complex transactions receive more regulatory scrutiny, correlate with greater cash holdings, and predict worse future performance. Overall, our study reinforces complexity’s role as a friction to decision-making and provides a richer and more flexible measure of complexity for future research.
Keywords: Complexity; textual analysis; GPT; price formation; machine learning
JEL codes: D82; D83; G14; G30; M40; M41
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Biography:
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Elizabeth Blankespoor is a Professor of Accounting and Marguerite Reimers Endowed Faculty Fellow at the University of Washington Foster School of Business. Professor Blankespoor’s research focuses on corporate disclosure in capital markets, and especially on the role of information processing costs and information technology in the flow of firms’ financial information. She has published in top accounting peer reviewed journals, including the Journal of Accounting and Economics (JAE), the Journal of Accounting Research (JAR), The Accounting Review (TAR), and the Review of Accounting Studies (RAST), and her work has received several awards, including the AAA FARS Best Paper Award (2017, 2021), the AAA FARS Midyear Meeting Best Paper Award (2017), and the RAST Conference Best Paper Award (2021). She is currently an editor of RAST, was an editor at TAR from 2020-2023, and is on the editorial board of JAE. Before joining UW Foster, she served on the faculty of the Stanford Graduate School of Business. She has won several awards for her teaching including the Stanford MSx Teaching Excellence Award, Stanford MBA Distinguished Teaching Award, and UW Foster Full-Time MBA Professor of the Year. She holds a PhD from the University of Michigan, a MAcc from the University of Utah, and a B.A. from Dordt University.
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