Does extended auditor disclosure deter managerial bad-news hoarding? Evidence from crash risk

Donghui Li, Lu Xing, Yang Zhao

Research output: Contribution to journalArticlepeer-review

12 Citations (SciVal)

Abstract

We examine how the mandatory adoption of extended auditor's reports (EARs) affects managerial bad-news hoarding through the lens of stock price crash risk. Relying on the UK's auditing standard change in 2013 as a quasi-natural experiment, we document a crash risk reduction for firms that were required to adopt EARs, relative to firms that were not so required. The crash risk reduction is related to EARs' disclosure of risks of material misstatement in revenue recognition. The negative effect of EARs adoption on crash risk is more pronounced for firms with scant public information and firms with non-Big-4 or non-industry-specialist auditors. EARs adoption induces firms to disclose more smaller pieces of negative information without changing firms' accruals management. Taken together, our results suggest that EARs adoption dampens bad-news hoarding by managers.

Original languageEnglish
Article number102256
JournalJournal of Corporate Finance
Volume76
DOIs
Publication statusPublished - 3 Aug 2022

Bibliographical note

Funding Information:
Donghui Li would like to thank the National Natural Science Foundation of China for financial support (Grant No. 71873058 ). Yang Zhao would like to thank the National Natural Science Foundation of China for financial support (Grant No. 71801117 ).

Data availability
Data sources are specified in the article.

Keywords

  • Extended auditor's report
  • Managerial bad-news hoarding
  • Risks of material misstatement
  • Stock price crash risk

ASJC Scopus subject areas

  • Business and International Management
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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