Readability of 10-K Reports and Stock Price Crash Risk

79 Pages Posted: 15 Jan 2014 Last revised: 13 Dec 2018

See all articles by Chansog (Francis) Kim

Chansog (Francis) Kim

The State University of New York at Stony Brook

Ke Wang

University of Alberta - School of Business

Liandong Zhang

Singapore Management University - School of Accountancy

Date Written: May 1, 2018

Abstract

This study shows that less readable 10-K reports are associated with higher stock price crash risk. The results are consistent with the argument that managers can successfully hide adverse information by writing complex financial reports, which leads to stock price crashes when the hidden bad news accumulates and reaches a tipping point. Cross-sectional analyses show that the effect of financial reporting complexity on crash risk is more pronounced for firms with persistent negative earnings news or transitory positive earnings news, greater chief executive officer stock option incentives, or lower litigation risk. Finally, accrual manipulation appears to be positively related to crash risk, even since the Sarbanes-Oxley Act, if the manipulation is accompanied by complex 10-K reports.

Keywords: readability, textual analysis, crash risk, SOX, 10-K

JEL Classification: D82, G12, G17, G18, M41

Suggested Citation

Kim, Chansog (Francis) and Wang, Ke and Zhang, Liandong, Readability of 10-K Reports and Stock Price Crash Risk (May 1, 2018). Contemporary Accounting Research, Forthcoming; University of Alberta School of Business Research Paper 2378586; Singapore Management University School of Accountancy Research Paper Series Vol. 6, No. 3 Paper No 2018-88. Available at SSRN: https://ssrn.com/abstract=2378586 or http://dx.doi.org/10.2139/ssrn.2378586

Chansog (Francis) Kim

The State University of New York at Stony Brook ( email )

College of Business
Stony Brook, NY 11794
United States
5163040037 (Phone)
631-632-9412 (Fax)

Ke Wang (Contact Author)

University of Alberta - School of Business ( email )

3-23 Business Building
Edmonton, Alberta T6G 2R6
Canada
+1 780-492-1630 (Phone)

Liandong Zhang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

HOME PAGE: http://accountancy.smu.edu.sg/faculty/profile/150531/Liandong-ZHANG

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