The Effect of Expense Recognition on Future Stock Price Crash Risk

45 Pages Posted: 5 Apr 2019

Date Written: March 13, 2019

Abstract

This study examines whether different patterns of expense recognition due to imperfect matching affect future stock price crash risk. A firm experiences a stock price crash when a large amount of hidden firm-specific bad news arrives at the stock market at once. Following Dichev and Tang (2008), I identify three expense recognition patterns: contemporaneous expense recognition, in which costs belonging to the current period are expensed in the current period; accelerated expense recognition, in which costs belonging to the current period are expensed in the previous period; and delayed expense recognition, in which costs belonging to the current period are expensed in the next period. I hypothesize that different expense recognition patterns affect transparency and stock price crash risk differently. I find that stock price crash risk increases with delayed expense recognition and decreases with accelerated expense recognition. This result suggests that expense recognition patterns play an important role in detecting managers’ revelation and suppression of bad news.

Keywords: expense recognition, matching, stock price crash risk

JEL Classification: M41

Suggested Citation

Paek, Wonsun, The Effect of Expense Recognition on Future Stock Price Crash Risk (March 13, 2019). Available at SSRN: https://ssrn.com/abstract=3352211 or http://dx.doi.org/10.2139/ssrn.3352211

Wonsun Paek (Contact Author)

Sungkyunkwan University ( email )

25-2, Sungkyunkwan-ro
Jongno-gu
Seoul, 03063
Korea, Republic of (South Korea)
+82-2-760-0415 (Phone)
+82-2-745-4566 (Fax)

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