IDEAS home Printed from https://ideas.repec.org/a/eee/ecmode/v94y2021icp715-725.html
   My bibliography  Save this article

Explain or conceal? Causal language intensity in annual report and stock price crash risk

Author

Listed:
  • Kong, Dongmin
  • Shi, Lu
  • Zhang, Fan

Abstract

Based on textual analysis technology, this paper investigates the relationship between causal language characteristics in annual financial reports and stock price crash risk. We find that the causal language intensity is positively associated with future stock price crash risk, which reveals that managers manipulate the causal language to successfully hide adverse information, then leading to higher stock price crash risk. Our results also hold after addressing the potential endogenous problems and robustness problems. Moreover, based on the mediation effect of information asymmetry, we demonstrate that the use of causal language can make information more complex to hide and mix adverse information, thus increasing information asymmetry. In addition, the positive effect of causal language intensity is stronger in the disclosure of bad news than good news. Overall, strategic information disclosure behavior that we reveal, has clear policy implications for regulators to strengthen the supervision firms’ information disclosures.

Suggested Citation

  • Kong, Dongmin & Shi, Lu & Zhang, Fan, 2021. "Explain or conceal? Causal language intensity in annual report and stock price crash risk," Economic Modelling, Elsevier, vol. 94(C), pages 715-725.
    • Handle: RePEc:eee:ecmode:v:94:y:2021:i:c:p:715-725
    DOI: 10.1016/j.econmod.2020.02.013
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0264999319319157
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.econmod.2020.02.013?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Inder K. Khurana & Raynolde Pereira & Eliza (Xia) Zhang, 2018. "Is Real Earnings Smoothing Harmful? Evidence from Firm‐Specific Stock Price Crash Risk," Contemporary Accounting Research, John Wiley & Sons, vol. 35(1), pages 558-587, March.
    2. Lo, Kin & Ramos, Felipe & Rogo, Rafael, 2017. "Earnings management and annual report readability," Journal of Accounting and Economics, Elsevier, vol. 63(1), pages 1-25.
    3. Biddle, Gary C. & Hilary, Gilles & Verdi, Rodrigo S., 2009. "How does financial reporting quality relate to investment efficiency?," Journal of Accounting and Economics, Elsevier, vol. 48(2-3), pages 112-131, December.
    4. Tim Loughran & Bill Mcdonald, 2014. "Measuring Readability in Financial Disclosures," Journal of Finance, American Finance Association, vol. 69(4), pages 1643-1671, August.
    5. Jin, Li & Myers, Stewart C., 2006. "R2 around the world: New theory and new tests," Journal of Financial Economics, Elsevier, vol. 79(2), pages 257-292, February.
    6. Kim, Jeong-Bon & Li, Yinghua & Zhang, Liandong, 2011. "CFOs versus CEOs: Equity incentives and crashes," Journal of Financial Economics, Elsevier, vol. 101(3), pages 713-730, September.
    7. Bloomfield, Robert, 2008. "Discussion of "Annual report readability, current earnings, and earnings persistence"," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 248-252, August.
    8. 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.
    9. Chen, Joseph & Hong, Harrison & Stein, Jeremy C., 2001. "Forecasting crashes: trading volume, past returns, and conditional skewness in stock prices," Journal of Financial Economics, Elsevier, vol. 61(3), pages 345-381, September.
    10. Ahsan Habib & Mostafa Monzur Hasan & Haiyan Jiang, 2018. "Stock price crash risk: review of the empirical literature," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(S1), pages 211-251, November.
    11. Koonce, Lisa & Seybert, Nick & Smith, James, 2011. "Causal reasoning in financial reporting and voluntary disclosure," Accounting, Organizations and Society, Elsevier, vol. 36(4), pages 209-225.
    12. Asay, H. Scott & Libby, Robert & Rennekamp, Kristina, 2018. "Firm performance, reporting goals, and language choices in narrative disclosures," Journal of Accounting and Economics, Elsevier, vol. 65(2), pages 380-398.
    13. Jun Chen & Kam C. Chan & Wang Dong & Feida (Frank) Zhang, 2017. "Internal Control and Stock Price Crash Risk: Evidence from China," European Accounting Review, Taylor & Francis Journals, vol. 26(1), pages 125-152, January.
    14. Xu, Nianhang & Li, Xiaorong & Yuan, Qingbo & Chan, Kam C., 2014. "Excess perks and stock price crash risk: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 419-434.
    15. Joseph D. Piotroski & T. J. Wong & Tianyu Zhang, 2015. "Political Incentives to Suppress Negative Information: Evidence from Chinese Listed Firms," Journal of Accounting Research, Wiley Blackwell, vol. 53(2), pages 405-459, May.
    16. Brian J. Bushee & Ian D. Gow & Daniel J. Taylor, 2018. "Linguistic Complexity in Firm Disclosures: Obfuscation or Information?," Journal of Accounting Research, Wiley Blackwell, vol. 56(1), pages 85-121, March.
    17. Li, Feng, 2008. "Annual report readability, current earnings, and earnings persistence," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 221-247, August.
    18. Guay, Wayne & Samuels, Delphine & Taylor, Daniel, 2016. "Guiding through the Fog: Financial statement complexity and voluntary disclosure," Journal of Accounting and Economics, Elsevier, vol. 62(2), pages 234-269.
    19. Cao, Chunfang & Xia, Changyuan & Chan, Kam C., 2016. "Social trust and stock price crash risk: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 46(C), pages 148-165.
    20. Wei Zhu, 2016. "Accruals and price crashes," Review of Accounting Studies, Springer, vol. 21(2), pages 349-399, June.
    21. Kim, Jeong-Bon & Li, Yinghua & Zhang, Liandong, 2011. "Corporate tax avoidance and stock price crash risk: Firm-level analysis," Journal of Financial Economics, Elsevier, vol. 100(3), pages 639-662, June.
    22. Hutton, Amy P. & Marcus, Alan J. & Tehranian, Hassan, 2009. "Opaque financial reports, R2, and crash risk," Journal of Financial Economics, Elsevier, vol. 94(1), pages 67-86, October.
    23. Li, Xiaorong & Chan, Kam C., 2016. "Communist party control and stock price crash risk: Evidence from China," Economics Letters, Elsevier, vol. 141(C), pages 5-7.
    24. Shuyu Zhang & Walter Aerts & Huifeng Pan, 2019. "Causal language intensity in performance commentary and financial analyst behaviour," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 46(1-2), pages 3-31, January.
    25. Cianci, Anna M. & Kaplan, Steven E., 2010. "The effect of CEO reputation and explanations for poor performance on investors' judgments about the company's future performance and management," Accounting, Organizations and Society, Elsevier, vol. 35(4), pages 478-495, May.
    26. Kim, Jaehyeon & Kim, Yongtae & Zhou, Jian, 2017. "Languages and earnings management," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 288-306.
    27. Lawrence, Alastair, 2013. "Individual investors and financial disclosure," Journal of Accounting and Economics, Elsevier, vol. 56(1), pages 130-147.
    28. Ertugrul, Mine & Lei, Jin & Qiu, Jiaping & Wan, Chi, 2017. "Annual Report Readability, Tone Ambiguity, and the Cost of Borrowing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(2), pages 811-836, April.
    29. Ahsan Habib & Mostafa Monzur Hasan, 2016. "Auditor-provided tax services and stock price crash risk," Accounting and Business Research, Taylor & Francis Journals, vol. 46(1), pages 51-82, January.
    30. S. P. Kothari & Susan Shu & Peter D. Wysocki, 2009. "Do Managers Withhold Bad News?," Journal of Accounting Research, Wiley Blackwell, vol. 47(1), pages 241-276, March.
    31. Callen, Jeffrey L. & Fang, Xiaohua, 2015. "Religion and Stock Price Crash Risk," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 50(1-2), pages 169-195, April.
    32. Callen, Jeffrey L. & Fang, Xiaohua, 2013. "Institutional investor stability and crash risk: Monitoring versus short-termism?," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3047-3063.
    33. An, Heng & Zhang, Ting, 2013. "Stock price synchronicity, crash risk, and institutional investors," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 1-15.
    34. Bushman, Robert M. & Piotroski, Joseph D., 2006. "Financial reporting incentives for conservative accounting: The influence of legal and political institutions," Journal of Accounting and Economics, Elsevier, vol. 42(1-2), pages 107-148, October.
    35. Li, Xiaorong & Wang, Steven Shuye & Wang, Xue, 2017. "Trust and stock price crash risk: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 76(C), pages 74-91.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wei, Lang & Zhang, Yiling, 2023. "Nonfinancial indicators in identifying stock price crash risk," Finance Research Letters, Elsevier, vol. 52(C).
    2. Duan, Jiangjiao & Lin, Jingjing, 2022. "Information disclosure of COVID-19 specific medicine and stock price crash risk in China," Finance Research Letters, Elsevier, vol. 48(C).
    3. Shao, Hanhua & Wang, Yuansheng & Wang, Yao & Li, Yuanjia, 2022. "Green credit policy and stock price crash risk of heavily polluting enterprises: Evidence from China," Economic Analysis and Policy, Elsevier, vol. 75(C), pages 271-287.
    4. Chen, Yufeng & Xu, Jing, 2023. "Digital transformation and firm cost stickiness: Evidence from China," Finance Research Letters, Elsevier, vol. 52(C).
    5. Kong, Xiaowei & Jin, Yifan & Liu, Lihua & Xu, Jialu, 2023. "Firms' exposures on COVID-19 and stock price crash risk: Evidence from China," Finance Research Letters, Elsevier, vol. 52(C).
    6. Zhang, Fan & Meng, Lei & Sun, Wen & Si, Yanwu, 2021. "Information technology and the labor market in China," Economic Analysis and Policy, Elsevier, vol. 72(C), pages 156-168.
    7. Wei, Lu & Jing, Haozhe & Huang, Jie & Deng, Yuqi & Jing, Zhongbo, 2023. "Do textual risk disclosures reveal corporate risk? Evidence from U.S. fintech corporations," Economic Modelling, Elsevier, vol. 127(C).
    8. Liu, Huan & Tao, Yunqing & Zeng, Lin & Chen, Dong, 2023. "Investor-enterprise interactions and shadow banking of non-financial enterprises in China," Finance Research Letters, Elsevier, vol. 55(PB).
    9. Richardson, Grant & Obaydin, Ivan & Liu, Chelsea, 2022. "The effect of accounting fraud on future stock price crash risk," Economic Modelling, Elsevier, vol. 117(C).
    10. Jun, Xiao & Huang, Wenwei & Guo, Yiting & Cao, Yuqiang & Lu, Meiting, 2023. "Why does economic policy uncertainty increase firm-level pollutant emission?," Economic Modelling, Elsevier, vol. 129(C).
    11. Huang, Shoujun & Liu, Hezhe, 2021. "Impact of COVID-19 on stock price crash risk: Evidence from Chinese energy firms," Energy Economics, Elsevier, vol. 101(C).
    12. Niu, Yuhao & Wen, Wen & Wang, Sai & Li, Sifei, 2023. "Breaking barriers to innovation: The power of digital transformation," Finance Research Letters, Elsevier, vol. 51(C).
    13. Zhang, Yi & Hu, Ailing & Wang, Jiahua & Zhang, Yaojie, 2022. "Detection of fraud statement based on word vector: Evidence from financial companies in China," Finance Research Letters, Elsevier, vol. 46(PB).
    14. Li, Jing & Li, Nan & Xia, Tongshui & Guo, Jinjin, 2023. "Textual analysis and detection of financial fraud: Evidence from Chinese manufacturing firms," Economic Modelling, Elsevier, vol. 126(C).
    15. Wu, Keping & Fu, Yumei & Kong, Dongmin, 2022. "Does the digital transformation of enterprises affect stock price crash risk?," Finance Research Letters, Elsevier, vol. 48(C).
    16. Wang, Liang & Wang, Qikai & Jiang, Fan, 2023. "Booster or stabilizer? Economic policy uncertainty: New firm-specific measurement and impacts on stock price crash risk," Finance Research Letters, Elsevier, vol. 51(C).
    17. Fahd Alduais & Nashat Ali Almasria & Abeer Samara & Ali Masadeh, 2022. "Conciseness, Financial Disclosure, and Market Reaction: A Textual Analysis of Annual Reports in Listed Chinese Companies," IJFS, MDPI, vol. 10(4), pages 1-22, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Muhammad Hamza Khan & Muhammad Rizwan *, 2021. "The Impact of Stock Price Crash Risk on the Cost of Capital: Empirical Study from China," Journal of Economic Impact, Science Impact Publishers, vol. 3(2), pages 88-97.
    2. Khalil Jebran & Shihua Chen & Ruibin Zhang, 2022. "Board social capital and stock price crash risk," Review of Quantitative Finance and Accounting, Springer, vol. 58(2), pages 499-540, February.
    3. Jebran, Khalil & Chen, Shihua & Zhang, Ruibin, 2020. "Board diversity and stock price crash risk," Research in International Business and Finance, Elsevier, vol. 51(C).
    4. Chen, Jing & Liu, Xinghe & Ou, Fenghao & Lu, Meiting & Wang, Peipei, 2023. "Green lending and stock price crash risk: Evidence from the green credit reform in China," Journal of International Money and Finance, Elsevier, vol. 130(C).
    5. Zuo, Jingjing & Qiu, Baoyin & Zhu, Guoyiming & Lei, Guangyong, 2023. "Local speculative culture and stock price crash risk," Research in International Business and Finance, Elsevier, vol. 64(C).
    6. Hou, Canran & Liu, Huan, 2023. "Institutional cross-ownership and stock price crash risk," Research in International Business and Finance, Elsevier, vol. 65(C).
    7. Shi, Lisi & Ho, Kung-Cheng & Liu, Ming-Yu, 2023. "Does societal trust make managers more trustworthy?," International Review of Financial Analysis, Elsevier, vol. 86(C).
    8. Ahsan Habib & Mostafa Monzur Hasan & Haiyan Jiang, 2018. "Stock price crash risk: review of the empirical literature," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(S1), pages 211-251, November.
    9. Hu, Juncheng & Li, Xiaorong & Duncan, Keith & Xu, Jia, 2020. "Corporate relationship spending and stock price crash risk: Evidence from China's anti-corruption campaign," Journal of Banking & Finance, Elsevier, vol. 113(C).
    10. Sun, Sophia Li & Habib, Ahsan & Huang, Hedy Jiaying, 2019. "Tournament incentives and stock price crash risk: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 54(C), pages 93-117.
    11. Xu, Lin & Rao, Yulei & Cheng, Yingmei & Wang, Jianxin, 2020. "Internal coalition and stock price crash risk," Journal of Corporate Finance, Elsevier, vol. 64(C).
    12. Leilei Gu & Jinyu Liu & Yuchao Peng, 2022. "Locality Stereotype, CEO Trustworthiness and Stock Price Crash Risk: Evidence from China," Journal of Business Ethics, Springer, vol. 175(4), pages 773-797, February.
    13. Lu, Jing & Qiu, Yuhang, 2023. "Does non-punitive regulation diminish stock price crash risk?," Journal of Banking & Finance, Elsevier, vol. 148(C).
    14. Hongmin Jin & Lu Wang & Zuoping Xiao & Hung‐Gay Fung, 2023. "What firm risk factors drive bank loan pricing and other terms? Evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(3), pages 2985-3010, September.
    15. Liao, Lin & Sharma, Divesh & Yang, Yitang (Jenny) & Zhao, Rui, 2023. "Adoption and content of key audit matters and stock price crash risk," International Review of Financial Analysis, Elsevier, vol. 88(C).
    16. Zaman, Rashid & Atawnah, Nader & Haseeb, Muhammad & Nadeem, Muhammad & Irfan, Saadia, 2021. "Does corporate eco-innovation affect stock price crash risk?," The British Accounting Review, Elsevier, vol. 53(5).
    17. Chen, Yangyang & Fan, Qingliang & Yang, Xin & Zolotoy, Leon, 2021. "CEO early-life disaster experience and stock price crash risk," Journal of Corporate Finance, Elsevier, vol. 68(C).
    18. Li, Tao & Xiang, Cheng & Liu, Zhuo & Cai, Wenwu, 2020. "Annual report disclosure timing and stock price crash risk," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    19. Yang, Jun & Lu, Jing & Xiang, Cheng, 2020. "Company visits and stock price crash risk: Evidence from China," Emerging Markets Review, Elsevier, vol. 44(C).
    20. Meng, Yongqiang & Shen, Dehua & Xiong, Xiong, 2023. "When stock price crash risk meets fundamentals," Research in International Business and Finance, Elsevier, vol. 65(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:94:y:2021:i:c:p:715-725. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30411 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.