Earnings smoothing : Does it exacerbate or constrain stock price crash risk?

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

44 Scopus Citations
View graph of relations

Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)36-54
Journal / PublicationJournal of Corporate Finance
Volume42
Online published9 Nov 2016
Publication statusPublished - Feb 2017
Externally publishedYes

Abstract

We examine the relation between earnings smoothing and stock price crash risk to evaluate the role of earnings smoothing on the downside risk of equity values. We find that, within firm, a higher degree of earnings smoothing is associated with greater crash risk; and this association, in the cross-section, is more pronounced for firms with fewer analysts following, smaller institutional holdings, and positive cumulative discretionary accruals. We also use stock returns to assess the economic significance of our results. We find that, controlling for firm fixed effects, earnings smoothing is associated with sizable negative returns in the quarter following the earnings announcement. Our findings caution investors about the downside risk of firms reporting smooth earnings, in contrast to the conventional belief that these firms are low in equity risk.

Research Area(s)

  • Earnings smoothing, External monitoring, Managerial opportunism, Private information signalling, Stock price crash risk