Examining the Economic Consequences of Stock Market Instabilities on Corporate Financial Reporting

Abstract

This study focuses on the effects of instabilities in the stock market on the quality of financial reporting in corporations with respect to the relationship between market instability and information accuracy. Using a time-series analysis panel dataset of 1,200 companies between the years 2015 and 2025, the study utilizes the Modified Jones Model for estimating discretionary accruals as an indicator of financial reporting quality. The findings of this study illustrate the existence of a strong positive relationship between market instability and earnings aggressiveness (r = 0.385, p < 0.01). Regression analysis shows that a 10% change in the level of stock market instability due to modern trends such as algorithmic trading causes discretionary accruals to increase by 1.54% ( = 0.154, p < 0.001). Furthermore, the findings show that although modern market disturbances lead to reporting deterioration in inherently sound companies, the presence of good governance processes plays a critical role in providing protection. In particular, the positive contribution of good audits performed by Big Four auditors reduces reporting aggressiveness by 5.6% (  = -0.056, p = 0.003). These results imply that market instability is the major driving force behind rising information asymmetries and decoupling of reported earnings from real economics.