قابلیت قیاس بیان مالی و خطر بروز سقوط احتمالی

ABSTRACT Financial statement comparability and expected crash risk

Comparability is a unique qualitative characteristic of financial information that enhances its usefulness (Financial Accounting Standards Board, or FASB, 2010). Differing from relevance (reliability), which focuses on the predictive (confirmatory) aspect of accounting information, the FASB defines comparability as the quality of information that enables users to identify similarities and differences in financial performance across firms. In this sense, comparability is particularly important to investors in the equity and debt markets, since their investing and lending decisions essentially involve evaluations of alternative opportunities or projects and these decisions cannot be made without comparable information (FASB, 1980).

Despite the importance of comparability emphasized by policymakers, empirical studies on comparability are relatively scarce and evidence of its usefulness is limited (Schipper, 2003). De Franco et al. (2011) empirically examine the benefits of comparability by focusing on analyst forecast accuracy, coverage, and dispersion. Subsequent studies have examined the impact of comparability on debt market participants’ assessment of firm credit risk (Kim et al., 2013), acquisition decisions (Chen et al., 2014), and managers’ propensity to issue earnings forecasts (Gong et al., 2013). Other studies examine comparability by focusing on the adoption of International Financial Reporting Standards (IFRS) (e.g., Lang et al., 2010; DeFond et al., 2011, 2013; Barth et al., 2012, 2013; Yip and Young, 2012; Wang, 2014).

Motivated by the limited research on information comparability, this study examines the impact of financial statement comparability on ex ante crash risk, which represents investors’ subjective assessment of future stock price crash risk. Interest in investors’ perceptions of crash risk has been increasing, particularly since the 2008 financial crisis. In the advent of the crisis, investors’ lack of confidence and fear of further decreases in prices have been identified among the various culprits behind the dramatic price declines. In discussing responses to the recent financial crisis, Blanchard (2009), then the chief economist of the International Monetary Fund (IMF), outlined, “So what are policymakers to do? First, and foremost, reduce uncertainty. Do so by removing tail risks, and the perception of tail risks.” Thus, understanding what affects investors’ perceived crash risk warrants our research.

Prior studies on crash risk often attribute stock price crashes to managers’ intentional information management (Bleck and Liu, 2007; Hutton et al., 2009; Kim et al., 2011a, 2011b; Kim and Zhang, 2015). At the center of this information theory are managers’ incentives and ability to hide bad news. When hidden bad news accumulates to a certain threshold, it will come out all at once, resulting in an abrupt, large-scale decline in stock price, namely, a stock price crash.

Recent studies on comparability suggest that a firm’s financial reporting comparability can lower users’ information acquisition and processing costs and increase the quality of financial information (De Franco et al., 2011; DeFond et al., 2011; Barth et al., 2012; Kim et al., 2013; Chen et al., 2014). For example, Kim et al. (2013) argue that comparable financial statements make it easier for investors to understand and evaluate firm performance, since fewer adjustments and less judgmental calculations with accounting numbers are needed when comparing a firm’s performance with that of its peers. De Franco et al. (2011) argue that comparability facilitates information transfer among comparable firms, such that investors make sharper inferences about their economic similarities and differences.

We argue that these benefits of comparability reduce managers’ incentives and ability to withhold bad news. This is because, by having access to and being able to understand information from comparable firms, investors can not only gain a better understanding of a firm’s performance but also obtain some of the bad news about it through inferences based on the performance and/or disclosures of its comparable peers, even in the absence of its disclosure.1 Since investors may have already obtained some of the undisclosed bad news about a firm by analyzing its comparable peer firms, the benefits to managers from bad news hoarding are likely to be smaller while the associated costs are likely to be higher. Therefore, the improved comparability disinclines managers from engaging in bad news hoarding behaviors. We thus predict that investors perceive those firms with more comparable financial statements to be less crash prone.

To test our prediction, we employ firm-specific measures of financial statement comparability based on De Franco et al. (2011), who define comparability as the closeness between two firms’ accounting systems in mapping economic events to financial statements. We measure firm-specific ex ante crash risk as the steepness of the implied volatility smirk.2 Using a large sample of firms with traded options from 1996 to 2013, we find that financial statement comparability is significantly and negatively associated with the steepness of the implied volatility smirk.3 For instance, we find that, on average, the volatility smirk is 9.52–11.90 percent higher for firms in the bottom decile of comparability than for firms in the top decile.4 These results are in line with our prediction that financial reporting comparability decreases the ex ante crash risk perceived by investors in the options market.

We further explore the settings under which we expect the comparability-crash risk relation to vary cross-sectionally. We find that the negative relation between comparability and investors’ perceived crash risk is more pronounced for firms in a lower-quality information environment, for firms with weaker external monitoring, and for firms operating in a less competitive industry. These results suggest that the effect of comparability on investor-perceived levels of crash risk is more pronounced when managers’ incentives and/or ability to hide bad news is less constrained.

To corroborate our conjecture that financial statement comparability disinclines managers from withholding bad news, we examine the effect of comparability on voluntary corporate disclosure of bad versus good news. Kothari et al. (2009) find greater stock market reactions to managers’ disclosure of bad news than to that of good news, suggesting a general tendency for managers to accumulate and withhold bad news relative to good news. Employing the methodology in Kothari et al. (2009), we find that financial statement comparability can mitigate the asymmetric market reaction to voluntary releases of positive versus negative dividend changes and that of good news versus bad news management earnings forecasts. This finding lends credence to the view that financial statement comparability tends to constrain managers’ bad new hoarding behavior.

Our study contributes to the literature in the following ways. First, we contribute to extant literature that examines the benefits of financial statement comparability. Prior studies examine the impact of comparability on analysts’ (De Franco et al., 2011) and debt market participants’ (Kim et al., 2013) valuation judgments. We provide evidence that comparability reduces ex ante crash risk perceived by options market participants. Understanding and managing investors’ fear of an unanticipated, large-scale decline in stock price is crucial to restoring asset value (Blanchard, 2009). In this respect, our results are relevant to standard setters who emphasize an important role of financial statement comparability in nurturing and restoring investor confidence (U.S. Securities and Exchange Commission, 2008).

Second, we contribute to the growing literature that attempts to link ex ante crash risk to financial reporting transparency. Bradshaw et al. (2010) find that discretionary accruals are significantly related to investors’ assessment of future crash risk. Kim and Zhang (2014) document that ex ante crash risk increases with the presence of financial restatements and internal control weaknesses. We focus on an across-firm accounting attribute, comparability. Importantly, we find that high comparability is associated with low ex ante crash risk, even after controlling for various aspects of reporting quality or transparency. In this respect, our results are relevant to standard setters and regulators who underscore the importance of understanding ex ante crash risk.

Third, we add to the literature on managers’ asymmetric disclosure of good versus bad news. On one hand, prior studies show that managers tend to systematically withhold bad news (Kothari et al., 2009; Ali et al., 2015). On the other hand, Kasznik and Lev (1995), Skinner (1997), Baginski et al. (2002), and Kothari et al. (2009) suggest that higher litigation risk and more stringent disclosure requirements can motivate managers to release bad news more promptly. Our study adds to this literature by providing new evidence that financial statement comparability, a unique across-firm attribute of financial reporting quality, can also disincline managers from withholding bad news.

The remainder of the paper is structured as follows. Section 2 reviews the related literature and develops the hypothesis. Section 3 describes our research design. Section 4 describes the sample. Section 5 presents the main empirical results and performs robustness checks. Section 6 reports the results for additional tests. Section 7 concludes the paper.