Cash Flow Opacity and Stock Price Crash Risk

• In Event: Market efficiency and anomalies
  In Paper Session: Market Efficiency and Anomalies

Abstract

We find that CFO opacity predicts future stock price crash risk incremental to accrual-based earnings opacity. We also find that the adverse effect of CFO opacity is more severe than that of accrual-based earnings opacity, and it becomes more pronounced after passage of the 2002 Sarbanes-Oxley (SOX) Act. Further, the adverse effect of CFO opacity on future crash risk is mitigated when the market imposes more scrutiny for (1) firms with analyst cash flow forecasts, (2) firms near financial distress, and (3) firms with long-term
issuer credit ratings near the investment/noninvestment-grade cutoff.

Authors

• Xia Zhang, University of Missouri

• Inder K Khurana, University of Missouri

• C.S. Agnes Cheng, The Hong Kong Polytechnic University