Operating Cash Flow Opacity and Stock Price Crash Risk

Abstract

We examine the relation between operating cash flow (OCF) opacity and stock price crash risk. We find that OCF opacity is positively associated with future stock price crash risk after controlling for accruals opacity and other determinants known to influence crash risk. This finding suggests that OCF opacity facilitates bad news hoarding and enables managerial resource diversion, which in turn increases crash risk. We also find that the positive relation between OCF opacity and crash risk is more pronounced when external monitoring is weak, information asymmetry is high, OCF importance is low, and cost of accruals management is high. Overall, our evidence highlights the severe consequence of OCF opacity in that it boosts crash risk; our study should alert the researchers, investors, and regulators to pay more attention to OCF management.

Keywords: OCF opacity; OCF management; accruals opacity; stock price crash risk

JEL Classification: G30, M41