Earnings smoothing: Does it exacerbate or constrain stock price crash risk?
Changling Chen,
Jeong-Bon Kim and
Li Yao
Journal of Corporate Finance, 2017, vol. 42, issue C, 36-54
Abstract:
We examine the relation between earnings smoothing and stock price crash risk to evaluate the role of earnings smoothing on the downside risk of equity values. We find that, within firm, a higher degree of earnings smoothing is associated with greater crash risk; and this association, in the cross-section, is more pronounced for firms with fewer analysts following, smaller institutional holdings, and positive cumulative discretionary accruals. We also use stock returns to assess the economic significance of our results. We find that, controlling for firm fixed effects, earnings smoothing is associated with sizable negative returns in the quarter following the earnings announcement. Our findings caution investors about the downside risk of firms reporting smooth earnings, in contrast to the conventional belief that these firms are low in equity risk.
Keywords: Stock price crash risk; Earnings smoothing; Managerial opportunism; Private information signalling; External monitoring (search for similar items in EconPapers)
JEL-codes: G12 G14 M41 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (63)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:42:y:2017:i:c:p:36-54
DOI: 10.1016/j.jcorpfin.2016.11.004
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