Financial reporting quality and amplification of financial crisis: Evidence from Korea

Abstract

In this study, we examine whether firms experience different stock price crash during financial crisis based on their financial reporting quality. Motivated from the prior research documenting that financial reporting quality implies information asymmetry and macroeconomic event affects heterogeneously across each firm, we investigate whether a firm with low financial reporting quality is more seriously affected by financial crisis. Using Korean firm data, we find that a firm’s stock returns decrease more under the financial crisis when it has provided low quality financial information. This relationship is more prominent in firms with high default risk. Our findings indicate that financial reporting quality plays an important role to support stock price under macroeconomic shocks. And our results imply that maintaining high financial reporting quality in ordinary time will reduce a firm’s exposure to macroeconomic shock because investors are more likely to hold qualified stocks during the financial crisis.