Opaque financial reports and R2: Revisited. Issue 1 (8th August 2013)

• Record Type: Journal Article
• Authors: Datta, Sudip; Iskandar‐Datta, Mai; Singh, Vivek
• Is Part Of: Review of financial economics. Volume 23:Issue 1(2014)
• Page Start: 10
• Page End: 17
• Publication Date: 2013-08-08
• Subjects: C1 -- D89 -- G19 -- M41; Earnings management -- Opacity -- R2 -- Discretionary accruals estimation; Business -- Periodicals; Economics -- Periodicals; Business; Economics; Electronic journals; Periodicals; 332.05
• DOI: 10.1016/j.rfe.2013.08.001
• Languages: English
• ISSNs: 1058-3300

Abstract

Abstract: In this study, we revisit the link between R 2 (synchronicity) and earnings management (opacity) because of the importance of the ongoing debate on the relation between idiosyncratic risk and earnings management in the finance and accounting literatures. Hutton et al. (J. Financial Economics, 2009) provide evidence of a positive link between opacity and R 2 . They interpret their finding to imply that firms with high R 2 (high synchronicity) have less firm‐specific information impounded in their stock price. Our results for this relationship fail to unequivocally support the results reported in Hutton et al. (2009). We show that their results are not only time variant but also not robust to the alternative empirical technique recommended for panel data by Petersen (2009) and alternative estimation of discretionary accruals adjusted for firm performance prescribed by Kothari et al. (2005). We also find no support for a convex relation between idiosyncratic risk and opacity. The findings documented in this study substantially revise some of Hutton et al.'s findings in this important and growing area of research.