Opaque Financial Reports, R-Square, and Crash Risk

56 Pages Posted: 4 Apr 2008 Last revised: 8 Jul 2009

See all articles by Amy P. Hutton

Amy P. Hutton

Boston College - Carroll School of Management

Alan J. Marcus

Boston College - Department of Finance

Hassan Tehranian

Boston College - Department of Finance

Date Written: October 30, 2008

Abstract

We investigate the relation between the transparency of financial statements and the distribution of stock returns. Using earnings management as a measure of opacity, we find that opacity is associated with higher R2s, indicating less revelation of firm-specific information. Moreover, opaque firms are more prone to stock price crashes, consistent with the prediction of the Jin and Myers (2006) model. However, these relations seem to have dissipated since the passage of the Sarbanes-Oxley Act, suggesting that earnings management has decreased or that firms can hide less information in the new regulatory environment.

Keywords: Transparency of financial statements, R-squares, Stock price crashes

JEL Classification: G12, D89, M41, M43, G34, G38

Suggested Citation

Hutton, Amy P. and Marcus, Alan J. and Tehranian, Hassan, Opaque Financial Reports, R-Square, and Crash Risk (October 30, 2008). Available at SSRN: https://ssrn.com/abstract=1115967 or http://dx.doi.org/10.2139/ssrn.1115967

Amy P. Hutton (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617 552 1951 (Phone)

Alan J. Marcus

Boston College - Department of Finance ( email )

Fulton Hall
Chestnut Hill, MA 02467
United States
617-552-2767 (Phone)
617-552-0431 (Fax)

Hassan Tehranian

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
617-552-3944 (Phone)
617-552-0431 (Fax)

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