Classification Shifting and Future Stock Price Crash Risk

Abstract

We examine whether classification shifting is associated with stock price crash risk. We predict that crash risk is positively associated with the reversal of core earnings of the shifters. We find that classification shifting is positively associated with future stock price crash risk even if the bottom-line net income is unchanged. This finding is robust after controlling for endogeneity and other determinants of classification shifting. We also find that the observed positive association between classification shifting and future stock price crash risk is pronounced for likely opportunistic classification shifters. Our research contributes to forming an enhanced understanding of crash risk.

Keywords: stock price crash, classification shifting, core earnings