Does extended auditor disclosure deter managerial bad-news hoarding? Evidence from crash risk

Donghui Li, Lu Xing and Yang Zhao

Journal of Corporate Finance, 2022, vol. 76, issue C

Abstract: We examine how the mandatory adoption of extended auditor's reports (EARs) affects managerial bad-news hoarding through the lens of stock price crash risk. Relying on the UK's auditing standard change in 2013 as a quasi-natural experiment, we document a crash risk reduction for firms that were required to adopt EARs, relative to firms that were not so required. The crash risk reduction is related to EARs' disclosure of risks of material misstatement in revenue recognition. The negative effect of EARs adoption on crash risk is more pronounced for firms with scant public information and firms with non-Big-4 or non-industry-specialist auditors. EARs adoption induces firms to disclose more smaller pieces of negative information without changing firms' accruals management. Taken together, our results suggest that EARs adoption dampens bad-news hoarding by managers.

Keywords: Extended auditor's report; Risks of material misstatement; Stock price crash risk; Managerial bad-news hoarding (search for similar items in EconPapers)
JEL-codes: G00 G14 G38 M42 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:76:y:2022:i:c:s0929119922000992

DOI: 10.1016/j.jcorpfin.2022.102256

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