Available-for-sale is Available for Hoarding: When Non-financial Firms Hold Financial Assets

50 Pages Posted: 29 Sep 2020 Last revised: 3 Jun 2021

See all articles by Xiaoran Ni

Xiaoran Ni

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE); Xiamen University - School of Economics

Yuchao Peng

Central University of Finance and Economics (CUFE) - School of Finance

Ji Shen

Peking University

Date Written: June 1, 2021

Abstract

This paper presents an empirical examination on how listed nonfinancial firms use one of the most important financial assets, namely, available-for-sale securities, as earnings manipulation tools because of bad-news-hoarding motives. In 2007, China set its first accounting standards for financial instruments, which classify financial assets based on the highly subjective “managerial holding intention” criterion. We find that from 2007 through 2016, the holding of available-for-sale securities is positively associated with the likelihood of stock price crashes for Chinese listed firms. The effect is more pronounced for firms with a CEO who has a finance background, higher information asymmetries, and less effective external monitoring. Our evidence indicates that in typical emerging markets, fair value accounting may have unintended consequences, inducing nonfinancial firms to employ financial assets as tools to hoard bad news.

Keywords: Financial Asset; Available-for-sale; Bad-News Hoarding; Stock Price Crash Risk; Earnings Manipulation; Fair Value Accounting

JEL Classification: G31; G34; G14

Suggested Citation

Ni, Xiaoran and Peng, Yuchao and Shen, Ji, Available-for-sale is Available for Hoarding: When Non-financial Firms Hold Financial Assets (June 1, 2021). Available at SSRN: https://ssrn.com/abstract=3672432 or http://dx.doi.org/10.2139/ssrn.3672432

Xiaoran Ni (Contact Author)

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

D 204, Economics Building
Xiamen, Fujian 361005
China

Xiamen University - School of Economics ( email )

China

Yuchao Peng

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

Ji Shen

Peking University ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China

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