Jan Barton
Emory University
Gregory Waymire
Emory University
Abstract: We examine whether managers have incentives to report high quality financial information in the absence of a regulatory mandate, and whether doing so lessens investor losses during a stock market crash. We focus on the October 1929 market crash that preceded the sweeping changes in financial reporting regulation embodied in the Securities Acts of the 1930s. Using a sample of common stocks traded on the New York Stock Exchange during October 1929, we find that the quality of firmsÂ’ financial reporting increases with managersÂ’ incentives to supply high quality financial information demanded by external investors. Moreover, firms with higher quality financial reporting prior to October 1929 experienced smaller stock price declines during the market crash. Our findings suggest that managers respond to private incentives in supplying high quality financial statements even in the absence of regulation, and one (perhaps unintended) consequence of such incentives is that shareholders experience smaller losses during a stock market crash.
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