Readability of 10‐K Reports and Stock Price Crash Risk

Jeong‐Bon Kim · Ke Wang · Liandong Zhang

428 citations0/0 files storedContemporary Accounting Research

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Auditing, Earnings Management, Governance Corporate Finance and Governance Financial Reporting and XBRL

Abstract

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.

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References

1981Biases in Dynamic Models with Fixed Effects 2011When Is a Liability Not a Liability? Textual Analysis, Dictionaries, and 10‐Ks 2002The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors 1980On the Impossibility of Informationally Efficient Markets 2005Selection on Observed and Unobserved Variables: Assessing the Effectiveness of Catholic Schools 1980On the Impossibility of Informationally Efficient Markets 2009How does financial reporting quality relate to investment efficiency?2005The market pricing of accruals quality

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