Accounting Conservatism and Stock Price Crash Risk: Firm-Level Evidence

65 Pages Posted: 15 Dec 2009 Last revised: 29 Nov 2013

Jeong-Bon Kim

University of Waterloo

Liandong Zhang

City University of Hong Kong

Multiple version iconThere are 2 versions of this paper

Date Written: September 29, 2013

Abstract

Using a large sample of U.S. firms over the period 1964–2007, we find that conditional conservatism is associated with the lower likelihood of a firm’s future stock price crashes. This finding holds for multiple measures of conditional conservatism and crash risk and it is robust to controlling for other known determinants of crash risk and firm fixed effects. Moreover, we find that the relation between conservatism and crash risk is more pronounced for firms with higher information asymmetries. Overall, our results are consistent with the notion that conditional conservatism limits managers’ incentive and ability to overstate performance and hide bad news from investors, which, in turn, reduces stock price crash risk.

Keywords: accounting conservatism, crash risk, bad news hoarding, asymmetric timeliness

JEL Classification: G12, M41

Suggested Citation

Kim, Jeong-Bon and Zhang, Liandong, Accounting Conservatism and Stock Price Crash Risk: Firm-Level Evidence (September 29, 2013). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1521345 or http://dx.doi.org/10.2139/ssrn.1521345

Jeong-Bon Kim (Contact Author)

University of Waterloo ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
1-519-888-4567 (Phone)
1-519-888-7562 (Fax)

Liandong Zhang

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

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