Financial statement comparability and expected crash risk

Outline

• Abstract
• Keywords
• Jel Classification
• 1. Introduction
• 2. Background, Related Literature, and Empirical Prediction
• 2.1. Financial Statement Comparability
• 2.2. Ex Ante Crash Risk
• 2.3. Link Between Financial Statement Comparability and Ex Ante Crash Risk
• 3. Research Design
• 3.1. Measurement of Perceived Crash Risk
• 3.2. Comparability Measurement
• 3.3. Empirical Model
• 4. Sample and Descriptive Statistics
• 5. Empirical Results
• 5.1. Main Results
• 5.2. Alternative Measures of Comparability
• 5.3. Other Robustness Tests
• 6. Additional Tests
• 6.1. Further Exploration of the Effect of Comparability on Expected Crash Risk
• 6.1.1. High- Versus Low-Quality Information Environment
• 6.1.2. Strong Versus Weak External Monitoring
• 6.1.3. High Versus Low Product Market Competition
• 6.2. Effect of Comparability on Voluntary Corporate Disclosure
• 7. Conclusions
• Appendix A. Variable Definitions
• Appendix B. Measurement of Implied Volatility Smirk
• Appendix C. Alternative Measures of Comparability
• C.1. Earnings Comovement
• C.2. Comparability Measures of Barth Et Al. (2012)
• References

Conclusions

In this study, we examine whether comparability reduces investors’ perception of crash risk. We find that the steepness of the volatility smirk decreases with financial statement comparability and this negative relation is more pronounced for firms with a lower-quality information environment, for firms with weak external monitoring, and for firms operating in a less competitive industry. Moreover, we find that managers’ general tendency to withhold bad news relative to good news is mitigated for firms with higher financial statement comparability. These results support our argument that financial statement comparability discourages managers from hiding bad news and accumulating it within a firm, which reduces investors’ perceptions of a firm’s future crash risk.

Our study adds to the prior literature that examines the benefits of financial statement comparability. Our results suggest that accounting comparability reduces ex ante crash risk by helping outside investors make cross-firm comparisons of disclosure policies and firm performance. Moreover, our study extends the literature on the role of financial reporting quality in the capital market by focusing on its relation to ex ante crash risk. Thus, our results are relevant to standard setters and regulators who underscore the importance of understanding ex ante crash risk. Finally, our study adds to prior literature that focuses on the managerial asymmetric disclosure of good versus bad news (e.g. Skinner, 1997; Kothari et al., 2009; Ali et al., 2015). We show that financial statement comparability disinclines corporate managers from withholding bad news.