Publication Type
Journal Article
Publication Date
1-2014
Abstract
The recent financial crisis has stimulated a renewed interest in understanding the determinants of stock price crash risk (i.e., left tail risk). Recent research shows that opaque financial reports enable managers to hide and accumulate bad news for extended periods. When the accumulated bad news reaches certain tipping point, it will be suddenly released to the market at once, resulting in an abrupt decline in stock price (i.e., a crash). This study extends this line of research by examining the impact of financial reporting opacity on perceived or expected crash risk. Prominent economists, such as Olivier Blanchard, argue that removing the perception of tail risks (in addition to realized tail risks) is crucial in restoring investor confidence and stabilizing the stock market. Using the steepness of option implied volatility skew as a proxy for perceived crash risk, we find that accrual management, the presence of financial statement restatements, and auditor-attested internal control weakness are all positively and significantly associated with the level of perceived crash risk. Our results suggest that improving financial reporting transparency is an important mechanism for firms and policymakers to reduce the perception of tail risks and stabilize the stock market.
Keywords
Financial Reporting Opacity, Expected Crash Risk, Implied Volatility Smirk, Internal Control Weakness, Restatements
Discipline
Accounting | Corporate Finance
Research Areas
Corporate Reporting and Disclosure
Publication
Contemporary Accounting Research
Volume
31
Issue
3
First Page
851
Last Page
875
ISSN
0823-9150
Identifier
10.1111/1911-3846.12048
Publisher
Canadian Academic Accounting Association
Citation
KIM, Jeong-Bon and ZHANG, Liandong.
Financial reporting opacity and expected crash risk: Evidence from implied volatility smirks. (2014). Contemporary Accounting Research. 31, (3), 851-875.
Available at: https://ink.library.smu.edu.sg/soa_research/1702
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
http://doi.org/10.1111/1911-3846.12048