Coordinated Inattention and Disclosure Complexity

We examine a beauty contest game with an option to analyze an additional disclosure. We analytically prove that in some scenarios, coordination incentives cause sophisticated players who can comprehend disclosures to choose not to analyze them to match unsophisticated players’ actions, a phenomenon we call “coordinated inattention.” Laboratory experiments provide support for the coordinated inattention mechanism: Coordination incentives reduce sophisticated subjects’ propensity to analyze disclosures, especially when they believe others are unlikely to comprehend them. We further find that psychological biases help reduce coordinated inattention. Subjects are overconfident, sophisticated subjects overestimate others’ ability to comprehend disclosures, and both biases are associated with a higher tendency to analyze disclosures. Our analysis suggests that unsophisticated decision makers’ inability to comprehend complex disclosures has a negative spillover effect by reducing sophisticated decision makers’ attention to disclosures. Our results highlight the importance of the recent efforts of the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) to make disclosures easier to comprehend.

This paper was accepted by Brian Bushee, accounting.

Funding: This study involved no funding except the payments made to the experimental subjects; these funds were provided by Penn State University.

Supplemental Material: The online appendix and electronic companion are available at https://doi.org/10.1287/mnsc.2021.01029.