Search results

The purpose of the study is to investigate the possible role of annual report readability in accrual anomaly, shedding light on why investors fail to incorporate accruals information in a timely and unbiased manner beyond the original naive investor fixation explanation.

Using five proxies of annual report readability and available data over 1993–2017, we investigate whether accrual overpricing is more severe when annual reports are less readable.

We find little (substantive) evidence of accrual overpricing among high (low) readability firms. The readability effects are contingent on the level of business complexity and earnings management.

This study extends the original naive investor fixation explanation and documents annual report complexity as a market friction in explaining the accrual anomaly, contributing to the mispricing vs risk debate and supporting the efficient market hypothesis.

Low readability of annual reports is a red flag to investors.

This study provides support for regulatory initiatives aimed at enhancing readability of corporate disclosures to address market frictions and improve market efficiency.

Accrual anomaly has posed a challenge to the efficient market hypothesis. This study draws on and adds to the line of research indicating that annual report complexity is a friction erecting a barrier to transparency, hindering market efficiency. This study contributes to our understanding of the enigmatic accrual anomaly.

The purpose of this paper is to investigate whether US regulatory actions around reverse mergers (RM) have exerted any spillover effects on the Chinese firms listed in China and whether Chinese firms have exhibited lower financial reporting quality than their US counterparts.

To test the possible spillover effect, this paper calculates three-day cumulative average abnormal returns (CAAR) and the aggregate CAAR for a series of US regulatory actions in 2010 and 2011. The study then compares the accrual quality, conditional conservatism, and information content of accruals of Chinese firms and US firms.

The paper documents a spillover effect of US actions around RM on Chinese stocks listed in China. Overall results do not support the perception that Chinese firms have lower financial reporting quality than their US counterparts.

While this study provides evidence consistent with investors perceiving poor financial reporting quality among Chinese firms, that perception is not justified by empirical evidence.

Investors need not be overly concerned about the financial reporting quality among the Chinese firms when they make asset allocation decisions.

A reality check is important given that perceptions may be outdated, biased, misleading, and costly.

This study puts the financial reporting quality of Chinese firms into perspective helping global investors assess information risk for optimal resource allocation.