TY - JOUR
T1 - Does extended auditor disclosure deter managerial bad-news hoarding? Evidence from crash risk
AU - Li, Donghui
AU - Xing, Lu
AU - Zhao, Yang
N1 - 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.
PY - 2022/8/3
Y1 - 2022/8/3
N2 - 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.
AB - 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.
KW - Extended auditor's report
KW - Managerial bad-news hoarding
KW - Risks of material misstatement
KW - Stock price crash risk
UR - http://www.scopus.com/inward/record.url?scp=85136059168&partnerID=8YFLogxK
U2 - 10.1016/j.jcorpfin.2022.102256
DO - 10.1016/j.jcorpfin.2022.102256
M3 - Article
AN - SCOPUS:85136059168
SN - 0929-1199
VL - 76
JO - Journal of Corporate Finance
JF - Journal of Corporate Finance
M1 - 102256
ER -