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

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