Abnormal real operations, real earnings management, and subsequent crashes in stock prices

Bill Francis (), Iftekhar Hasan and Lingxiang Li ()

Review of Quantitative Finance and Accounting, 2016, vol. 46, issue 2, 217-260

Abstract: We study the impact of firms’ abnormal business operations on their future crash risk in stock prices. Computed based on real earnings management (REM) models, firms’ deviation in real operations (DROs) from industry norms is shown to be positively associated with their future crash risk. This association is incremental to that between discretionary accruals (DAs) and crash risk found by prior studies. Moreover, after Sarbanes–Oxley Act (SOX) of 2002, DRO’s predictive power for crash risk strengthens substantially, while DA’s predictive power essentially dissipates. These results are consistent with the prior finding that managers shift from accrual earnings management to REM after SOX. We further develop a suspect-firm approach to capture firms’ use of DRO for REM purposes. This analysis shows that REM-firms experience a significant increase in crash risk in the following year. These findings suggest that the impact of DRO on crash risk is at least partially through REM. Copyright Springer Science+Business Media New York 2016

Keywords: Crash risk; Deviation in real operations; Earnings management; Real earnings management; Sarbanes–Oxley; D89; G19; M10; M41 (search for similar items in EconPapers)
Date: 2016
References: Add references at CitEc
Citations: View citations in EconPapers (57)

Downloads: (external link)
http://hdl.handle.net/10.1007/s11156-014-0468-y (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Abnormal real operations, real earnings management, and subsequent crashes in stock prices (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:rqfnac:v:46:y:2016:i:2:p:217-260

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/11156/PS2

DOI: 10.1007/s11156-014-0468-y

Access Statistics for this article

Review of Quantitative Finance and Accounting is currently edited by Cheng-Few Lee

More articles in Review of Quantitative Finance and Accounting from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().