Accruals and price crashes

Wei Zhu ()
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Wei Zhu: University of Illinois at Urbana-Champaign

Review of Accounting Studies, 2016, vol. 21, issue 2, No 1, 349-399

Abstract: Abstract I investigate the relation between accruals and firm-level price crashes, representing extreme price decreases in weekly returns. I find that high accruals predict a higher price crash probability than low accruals. This finding can be explained by managers’ use of income-increasing accrual estimates to hoard bad news. Once accumulated bad news crosses a tipping point, it is released all at once and results in a price crash. Consistent with this explanation, I find the observed relation to be the strongest for operating assets (the least reliable accrual components). Cross-sectional analyses further support the bad news hoarding explanation.

Keywords: Accruals; Crashes; Bad news hoarding; Default risk (search for similar items in EconPapers)
JEL-codes: G12 M41 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (37)

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DOI: 10.1007/s11142-016-9355-1

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