Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/323529 
Year of Publication: 
2025
Citation: 
[Journal:] Review of Derivatives Research [ISSN:] 1573-7144 [Volume:] 28 [Issue:] 2 [Article No.:] 9 [Publisher:] Springer US [Place:] New York [Year:] 2025
Publisher: 
Springer US, New York
Abstract: 
Abstract We investigate whether originators of mortgage-backed securities lower the comprehensibility of disclosure documents to obfuscate low security quality. Utilizing commonly used complexity proxies primarily based on the volume of the investment prospectus, we find no impact on the performance of European mortgage-backed securities. In contrast, focusing on the comprehensibility as a combination of prospectus volume and text readability, we find that originators obfuscate low security quality by lowering the comprehensibility of the investment prospectus, resulting in greater defaults and lower returns. Investors only partially price these dimensions of complexity: Since the financial crisis, investors have been demanding a significant risk premium for prospectus volume but not for text readability. These findings underscore the importance of assessing comprehensibility of disclosure documents beyond traditional complexity measures and highlight potential implications for originators, investors and regulators in communicating, understanding and mitigating the risks associated with complex financial instruments.
Subjects: 
Complexity
Disclosure
Prospectus comprehensibility
Security design
Text analysis
Persistent Identifier of the first edition: 
Additional Information: 
D82;D83;G01;G12;G14;G23;M41
Creative Commons License: 
cc-by Logo
Document Type: 
Article
Document Version: 
Published Version
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