The Asymmetric Effect of Reporting Flexibility on Priced Risk
44 Pages Posted: 7 Oct 2015 Last revised: 1 Nov 2016
Date Written: April 16, 2016
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: Suggested Citation