Opaque Financial Reports, R-Square, and Crash Risk
56 Pages Posted: 4 Apr 2008 Last revised: 8 Jul 2009
Date Written: October 30, 2008
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: Suggested Citation