The Effects of operating cash flow opacity on stock price crash risk: Evidence from Korea

This study investigates the association between operating cash flow (hereafter, OCF) opacity and stock price crash risk. In recent years, OCF has been put on notice in terms of detecting accounting fraud and assessing firm value. OCF provides investors with useful information and has become more value relevant than earnings. Given the importance of OCF, managers have incentives to manage OCF in order to increase reporting performance or mislead investors. If managers do manage OCF, which in turn increases OCF opacity, it is easier for managers to hoard bad news and divert resources. If this is the case and long-lasting, bad news will be accumulated which leads to stock price crash at the end. Using Korean firms listed in Korean Stock Exchange (KSE) from 2002 to 2018, this research examines whether OCF opacity is positively associated with future stock price crash risk. We use unexpected OCF opacity and find positive association between OCF opacity and future stock price crash risk. Further, we also find that the positive association between OCF opacity and future stock price crash risk is more pronounced during the post-IFRS periods which allow managers to classify cash flow at their discretion. Overall, this approach broadens the scope of accounting transparency research, emphasizing the role of OCF in enhancing the credibility of financial information for investors. Also, this research highlights the adverse impacts of OCF opacity on stakeholders, reinforcing the need for investors to closely monitor OCF management practices. This results have practical implications for regulators and policymakers by suggesting potential areas for improvement in accounting standards and practices to safeguard stakeholder interests and improve information reliability. By focusing on firms listed on the Korean Stock Exchange, the study provides valuable insights into how accounting and information disclosure practices in Korea are associated with stock price behavior. Our evidence suggests that OCF opacity caused by managerial discretionary OCF management has an adverse effect on firm value and firm’s stakeholders.