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The causal effect of improved readability of financial reporting on stock price crash risk: Evidence from the Plain Writing Act of 2010

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  • Yin, Shiyan
  • Chevapatrakul, Thanaset
  • Yao, Kai

Abstract

This paper shows that obfuscating financial reports leads to an increase in the risk of stock price crash. Exploiting the Plain Writing Act of 2010 (PWA) as the exogenous source of variation, the results of the difference-in-differences (DID) estimation show that improved readability of 10-Ks, as a result of the PWA, caused the stock price crash risk to fall. Our results survive the falsification check and are robust under different measures of readability and crash risk.

Suggested Citation

  • Yin, Shiyan & Chevapatrakul, Thanaset & Yao, Kai, 2022. "The causal effect of improved readability of financial reporting on stock price crash risk: Evidence from the Plain Writing Act of 2010," Economics Letters, Elsevier, vol. 216(C).
    • Handle: RePEc:eee:ecolet:v:216:y:2022:i:c:s0165176522001872
    DOI: 10.1016/j.econlet.2022.110614
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    Cited by:

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    2. Richardson, Grant & Obaydin, Ivan & Liu, Chelsea, 2022. "The effect of accounting fraud on future stock price crash risk," Economic Modelling, Elsevier, vol. 117(C).

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    More about this item

    Keywords

    Crash risk; Financial reporting; Readability; Textual analysis;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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