Is Real Earnings Smoothing Harmful? Evidence from Firm-Specific Stock Price Crash Risk

50 Pages Posted: 19 Sep 2017 Last revised: 13 Jul 2022

See all articles by Inder K. Khurana

Inder K. Khurana

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business

Raynolde Pereira

University of Missouri at Columbia - School of Accountancy

Eliza Xia Zhang

University of Washington Tacoma; University of Washington, Tacoma

Date Written: July 12, 2017

Abstract

This study examines whether and when real earnings smoothing influences firm-specific stock price crash risk. Using a sample of U.S. public firms for the years 1993 through 2014, we find real earnings smoothing to be positively associated with firm-specific stock price crash risk. This finding is consistent with the view that real earnings smoothing helps managers withhold bad news, keep poor-performing projects, conceal resource diversion, and engage in ineffective risk management, which increases crash risk. Further, we find a stronger relation between crash risk and real earnings smoothing when firm uncertainty is higher, product market competition is lower, and balance sheet constraint is higher. Overall, our study suggests that real earnings smoothing destroys shareholder value in that it increases stock price crash risk.

Keywords: Real earnings smoothing, bad news hoarding, rent extraction, and stock price crash risk

Suggested Citation

Khurana, Inder and Pereira, Raynolde and Zhang, Eliza Xia and Zhang, Eliza Xia, Is Real Earnings Smoothing Harmful? Evidence from Firm-Specific Stock Price Crash Risk (July 12, 2017). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3037340

Inder Khurana

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business ( email )

331 Cornell Hall
Columbia, MO 65211
United States
573-882-3474 (Phone)
573-882-2437 (Fax)

Raynolde Pereira

University of Missouri at Columbia - School of Accountancy ( email )

337 Cornell Hall
Columbia, MO 65211
United States
573-882-6253 (Phone)

Eliza Xia Zhang (Contact Author)

University of Washington Tacoma ( email )

310 Dougan
Tacoma, WA WASHINGTON 98402
United States
5738235607 (Phone)
5738235607 (Fax)

University of Washington, Tacoma

1900 Commerce Street
Tacoma, WA 98402-3100
United States

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