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

52 Pages Posted: 20 Mar 2014 Last revised: 6 Oct 2014

See all articles by Jeong-Bon Kim

Jeong-Bon Kim

City University of Hong Kong

Liandong Zhang

Singapore Management University - School of Accountancy

Multiple version iconThere are 2 versions of this paper

Date Written: March 19, 2014

Abstract

Using a large sample of U.S. firms during 1964–2007, we find that conditional conservatism is associated with a lower likelihood of a firm’s future stock price crashes. This finding holds for multiple measures of conditional conservatism and crash risk and 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 asymmetry. 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: conditional conservatism; asymmetric timeliness; return distribution; bad news hoarding; extreme events

JEL Classification: G12, M41

Suggested Citation

Kim, Jeong-Bon and Zhang, Liandong, Accounting Conservatism and Stock Price Crash Risk: Firm-Level Evidence (March 19, 2014). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2411369

Jeong-Bon Kim (Contact Author)

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Liandong Zhang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

HOME PAGE: http://accountancy.smu.edu.sg/faculty/profile/150531/Liandong-ZHANG

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