Abstract
This study examines the association between earnings comparability and firm-specific stock price crash risk. Using a large sample of 33,696 firm-year observations from the U.S. public firms, we find a positive association between comparability and future stock price crash risk. This finding is consistent with the notion that corporate managers do not have much incentive to release firm-specific information (especially bad news), as long as their firms’ financial statements are comparable to those of the industry peers. We further show that the positive association between earnings comparability and future crash risk is attenuated for firms with strong external monitoring (i.e., high analyst coverage, high institutional ownership, and high audit quality) and firms with low information asymmetry (i.e., low probability of informed trading). Our results are robust to (1) controlling for other important earnings attributes (e.g., conditional conservatism and income smoothing) that are associated with crash risk, (2) conducting change analyses, and (3) using alternative measures of earnings comparability. Our findings have an important implication that earnings comparability does not always result in favorable capital market outcomes.
Highlights
Stock price crash risk, a third moment of stock return distributions capturing extreme downside risk (Note 1), has become a critical issue for investors, regulators, practitioners, and researchers
This study examines the association between earnings comparability and firm-specific stock price crash risk
This finding is consistent with the notion that corporate managers do not have much incentive to release firm-specific information, as long as their firms’ financial statements are comparable to those of the industry peers
Summary
A third moment of stock return distributions capturing extreme downside risk (Note 1), has become a critical issue for investors, regulators, practitioners, and researchers. Our finding contrasts with the widely accepted notion that comparability reduces information opacity and in turn reduces crash risk Instead, it suggests that managers do not have much incentive to voluntarily release firm-specific information, especially the bad news of the firms, as long as their firms’ financial statement is comparable to the industry peers. 2018, Vol 8, No 3 compensation (Kim, Li and Zhang, 2011a), tax avoidance behaviors (Kim, Li, and Zhang, 2011b), conditional accounting conservatism (Kim and Zhang, 2016), institutional ownership (Callen and Fang, 2013), corporate social responsibility performance (Kim, Li, and Li, 2014), and income smoothing (Khurana, Pereira, and Zhang, 2018) Our study complement this line of study by highlighting the incremental effect of earnings comparability on future crash risk over certain common earnings attributes, such as financial reporting opacity, conditional conservatism, income smoothing.
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