According to the "big bath theory," when firms disclose bad news, there is a positive response by the market because the firm has recognized in the financial statements that a major problem exists and is moving to redress the problem.

Question

Quizplus · Accepted Answer

The "big bath theory" suggests that firms intentionally disclose bad news all at once to "clean the slate" and present a positive outlook for the future. The market may respond positively because the firm is taking action to address issues, even if it means recognizing losses or other negative impacts in the financial statements.

According to the "Big Bath Theory," When Firms Disclose Bad