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Readability of 10‐K Reports and Stock Price Crash Risk

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  • Chansog (Francis) Kim
  • Ke Wang
  • Liandong Zhang

Abstract

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. Lisibilité des rapports 10‐K et risque d'effondrement du cours des actions L’étude réalisée par les auteurs montre que les rapports 10‐K dont la lisibilité laisse à désirer sont associés à un risque plus élevé d'effondrement du cours des actions. Les résultats obtenus attestent l'allégation selon laquelle les gestionnaires peuvent dissimuler avec succès les informations négatives en rédigeant des rapports financiers complexes, ce qui conduit à l'effondrement du cours des actions sur le marché boursier lorsque les mauvaises nouvelles ainsi camouflées s’étant accumulées, elles atteignent un point critique. Des analyses transversales révèlent que l'incidence de la complexité de l'information financière sur le risque d'effondrement est plus marquée dans le cas des sociétés qui publient des résultats négatifs de façon récurrente ou des résultats positifs passagers, qui offrent au chef de la direction davantage d'incitatifs sous forme d'options d'achat d'actions ou qui sont exposées à un risque de poursuites judiciaires moins important. Enfin, la manipulation des régularisations semble être en relation positive avec le risque d'effondrement, même depuis l'adoption de la loi Sarbanes‐Oxley, si elle s'accompagne de rapports 10‐K complexes.

Suggested Citation

  • Chansog (Francis) Kim & Ke Wang & Liandong Zhang, 2019. "Readability of 10‐K Reports and Stock Price Crash Risk," Contemporary Accounting Research, John Wiley & Sons, vol. 36(2), pages 1184-1216, June.
  • Handle: RePEc:wly:coacre:v:36:y:2019:i:2:p:1184-1216
    DOI: 10.1111/1911-3846.12452
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    References listed on IDEAS

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    1. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
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