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Do baths muddy the waters or clear the air?

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  • Haggard, K. Stephen
  • Howe, John S.
  • Lynch, Andrew A.

Abstract

We examine the information environments of firms following large, non-recurring charges (“baths”). We test competing hypotheses about the consequences of a bath—a bath either improves the information environment (the transparency hypothesis) or degrades it (the opacity hypothesis). Difference-in-differences analysis suggests that after a bath (1) earnings become smoother, (2) firm-level information asymmetry decreases, and (3) stock returns become more responsive to unexpected earnings. We interpret these findings as supportive of the transparency hypothesis. We also document that the relative improvement in the information environment is greater for baths that are not voluntary, consistent with managerial obfuscation prior to the bath.

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  • Haggard, K. Stephen & Howe, John S. & Lynch, Andrew A., 2015. "Do baths muddy the waters or clear the air?," Journal of Accounting and Economics, Elsevier, vol. 59(1), pages 105-117.
    • Handle: RePEc:eee:jaecon:v:59:y:2015:i:1:p:105-117
    DOI: 10.1016/j.jacceco.2014.09.007
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    More about this item

    Keywords

    Earnings smoothing; Earnings responsiveness; Information asymmetry;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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