Opaque financial reports, R2, and crash risk

Amy P. Hutton, Alan Marcus and Hassan Tehranian

Journal of Financial Economics, 2009, vol. 94, issue 1, 67-86

Abstract: We investigate the relation between the transparency of financial statements and the distribution of stock returns. Using earnings management as a measure of opacity, we find that opacity is associated with higher R2s, indicating less revelation of firm-specific information. Moreover, opaque firms are more prone to stock price crashes, consistent with the prediction of the Jin and Myers [2006. R2 around the world: new theory and new tests. Journal of Financial Economics 79, 257-292] model. However, these relations seem to have dissipated since the passage of the Sarbanes-Oxley Act, suggesting that earnings management has decreased or that firms can hide less information in the new regulatory environment.

Keywords: Earnings; management; R2; Crashes; Transparency (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (769)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:94:y:2009:i:1:p:67-86

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