The Asymmetric Effect of Reporting Flexibility on Priced Risk

44 Pages Posted: 7 Oct 2015 Last revised: 1 Nov 2016

See all articles by Matthew J. Bloomfield

Matthew J. Bloomfield

The Wharton School of the University of Pennsylvania

Date Written: April 16, 2016

Abstract

I examine the link between "reporting flexibility" and systematic risk exposure. Using SOX compliance and internal control status as proxies for reporting flexibility, I find that firms with greater reporting flexibility comove more strongly with downmarkets than with upmarkets, a phenomenon I refer to as "risk asymmetry." Using a regression discontinuity design, I further provide evidence demonstrating that reporting flexibility causes risk asymmetry. Taken together with prior literature (notably Ang, Chen and Xing (2006), who document that risk asymmetry is priced), my results suggest that firms can lower their costs of capital by credibly reducing their reporting flexibility.

Keywords: Reporting Quality, Accrual Quality, Reporting Flexibility, SOX, Risk Asymmetry

JEL Classification: M41, M42, M48, G14

Suggested Citation

Bloomfield, Matthew J., The Asymmetric Effect of Reporting Flexibility on Priced Risk (April 16, 2016). Available at SSRN: https://ssrn.com/abstract=2669731 or http://dx.doi.org/10.2139/ssrn.2669731

Matthew J. Bloomfield (Contact Author)

The Wharton School of the University of Pennsylvania ( email )

1325 Steinberg-Dietrich Hall
3620 Locust Walk
Philadelphia, PA PA 19103-1724
United States
6073513042 (Phone)
6073513042 (Fax)

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