Measuring Firm Complexity

In business research, firm size is both ubiquitous and readily measured. Another firm-related construct, complexity, also is frequently relevant as a control variable, but difficult to measure and not well-defined. Typically, measures such as the number of firm segments or the readability of a firm’s financial filings are used as proxies for some aspect of complexity. We argue that most extant measures of complexity are mismeasured or not widely available. We propose a text-based solution as an omnibus measure of this multidimensional concept and use audit fees, which primarily are driven by size and complexity, as the empirical framework for evaluation.