Accounting disclosure, stock price synchronicity and stock crash risk. An emerging-market perspective

• Date: 05 October 2015
• DOI: https://doi.org/10.1108/IJAIM-02-2015-0007
• Published date: 05 October 2015
• Pages: 349-363
• Author: Liang Song
• Subject Matter: Accounting & Finance,Accounting/accountancy,Accounting methods/systems

Accounting disclosure, stock

price synchronicity and stock

crash risk

An emerging-market perspective

Liang Song

School of Business and Economics, Michigan Technological University,

Houghton, Michigan, USA

Abstract

Purpose – This study aims to examine the effects of rms’ accounting disclosure policies on stock

price synchronicity and stock crash risk, using a sample including 13 emerging markets. Furthermore,

this research investigates how these relationships are affected by country-level investor protection and

rm-level governance rankings.

Design/methodology/approach – This paper uses accounting disclosure measures constructed

based on survey questions by Credit Lyonnais Securities Asia (2001, CLSA). The accounting disclosure

measure is used to explain the two dependent variables, stock price synchronicity and stock crash risk.

The stock price synchronicity measure is dened as the logistic transformation of R

2

following Hutton

et al. (2009) and Jin and Myers (2006). R

2

is taken from the estimation of an extended market model. The

stock crash risk variable is measured as the frequency difference between extremely negative and

positive stock return residues following Jin and Myers (2006). These stock return residues are taken

from the estimation of an extended market model. Because the CLSA rm-level disclosure data are from

2000, this paper matches other data taken from the same year, for consistency. The nal sample includes

204 observations in 13 emerging countries.

Findings – This paper nds that rms’ stocks are less synchronized with the entire market and have

less crash risk if rms have superior accounting disclosure policies. These results suggest that the cost

to collect rm-specic information may be decreased for investors if rms are more transparent. Thus,

these rms’ stocks have more rm-specic information content. These results also suggest that

management is less likely to hide some negative information and release such negative information

suddenly in the future if rms have higher levels of accounting disclosure. Thus, these rms’ stocks are

less likely to crash. In addition, the inuences of rms’ accounting disclosure policies on stock price

synchronicity and crash risk are more signicant for rms with superior country-level investor

protection and rm-level governance rankings. These results imply that external investors place more

value on accounting disclosure by well-governed rms because rms with superior governance

standards are less likely to intentionally disclose misleading information. Thus, these rms’ stocks can

incorporate more rm-specic information and have less crash risk.

Originality/value – The current study is the rst to show that the effects of accounting disclosure on

stock price synchronicity and crash risk are more pronounced for rms with superior country-level

investor protection and rm-level governance standards. Thus, this research extends the literature by

providing a comprehensive picture of the inuences of accounting disclosure on stock markets. In

addition, the existing literature (Chen et al., 2006; Durnev et al., 2004) shows that rms with lower stock

JEL classication – M41, M48

Portions of this research were completed when Dr Liang Song was an Assistant Professor of

Accounting at Michigan Technological University and was at the Bank of Finland, Finland.

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/1834-7649.htm

Accounting

disclosure

349

Received 10 February 2015

Revised 11 February 2015

Accepted 11 February 2015

InternationalJournal of

Accounting& Information

Management

Vol.23 No. 4, 2015

pp.349-363

©Emerald Group Publishing Limited

1834-7649

DOI 10.1108/IJAIM-02-2015-0007