Impact of Informational, Operational, and Corporate Governance Complexity Components of Companies on Mispricing of Stocks

Abstract

Objective: One of the important factors that investors are faced with in a stock exchange is the complexity of companies. Complexity can disrupt the process of extracting and using the required financial information. Increasing market uncertainty influences stock pricing. The main purpose of this research is to investigate the effect of informational, operational, and corporate governance complexity components in firms on stock pricing. Methods: The statistical sample of this research consists of 180 companies enlisted in Tehran Stock Exchange (TSE) from 2009 to 2019. Results: The achieved results showed that the components of company informational complexity (i.e. divergence, negative operating cash flow, accruals, consolidated financial statements, the standard deviation of operating cash flow, and standard deviation of net changes in operating assets) have a positive and significant effect on the incorrect stock pricing. Also, among the components of operational complexity, three indices (i.e. cycle length, export sale ratio, and product variety of the company) have a positive and significant relationship with incorrect stock pricing. However, the present study could identify no significant relationship between production technology level and incorrect stock pricing in Iran. Finally, the components of leadership complexity (i.e. political communication, CEO tenure, and ownership concentration) were found to have a positive and significant relationship with incorrect stock pricing. Conclusion: The results showed that the complexity of companies affects the mispricing of stocks, which increases the risk of making wrong stock choices for investors.

Keywords

• informational complexity
• operational complexity
• corporate governance
• mispricing of stocks