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Readability of 10‐K Reports and Stock Price Crash Risk
Author(s) -
Kim Chansog Francis,
Wang Ke,
Zhang Liandong
Publication year - 2019
Publication title -
contemporary accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.769
H-Index - 99
eISSN - 1911-3846
pISSN - 0823-9150
DOI - 10.1111/1911-3846.12452
Subject(s) - earnings , accrual , stock price , crash , incentive , stock (firearms) , business , actuarial science , readability , accounting , economics , monetary economics , computer science , microeconomics , engineering , paleontology , series (stratigraphy) , programming language , mechanical engineering , biology
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.