Is Real Earnings Smoothing Harmful? Evidence from Firm-Specific Stock Price Crash Risk
50 Pages Posted: 19 Sep 2017 Last revised: 13 Jul 2022
Date Written: July 12, 2017
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
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