Author(s): Young Zik Shin, Kyeongmin Jeon
This study investigates the relation between transparency of accruals quality and stock price crash risk. The result shows that higher accruals quality (transparency) reduces stock crash risk, consistent with prior studies that show a positive relation between opaque financial statements and crash risk using the absolute value of discretionary accruals as a proxy for financial statement information opacity. In further analyses, we find that transparency driven by innate factors of accruals quality reduce stock crash risk than transparency driven by discretionary accruals quality. This finding illuminates the importance of the innate feature of accruals quality and supports prior studies that argue the difficulty of discerning managerial intent to report opportunistically or responsibly over accounting and reporting choices. Because the discretionary component of accruals quality suffers from a mixture of both features that could undermine investor’s capability to interpret financial information that distorts pricing decisions.