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Opaque financial reports, R2, and crash risk

Listed author(s):
  • Hutton, Amy P.
  • Marcus, Alan J.
  • Tehranian, Hassan

We investigate the relation between the transparency of financial statements and the distribution of stock returns. Using earnings management as a measure of opacity, we find that opacity is associated with higher R2s, indicating less revelation of firm-specific information. Moreover, opaque firms are more prone to stock price crashes, consistent with the prediction of the Jin and Myers [2006. R2 around the world: new theory and new tests. Journal of Financial Economics 79, 257-292] model. However, these relations seem to have dissipated since the passage of the Sarbanes-Oxley Act, suggesting that earnings management has decreased or that firms can hide less information in the new regulatory environment.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304-405X(09)00099-3
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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 94 (2009)
Issue (Month): 1 (October)
Pages: 67-86

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Handle: RePEc:eee:jfinec:v:94:y:2009:i:1:p:67-86
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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