Discretionary income smoothing and crash risk: evidence from China

Yuxiang Zhong, Wanli Li and Yue Li

Asia-Pacific Journal of Accounting & Economics, 2021, vol. 28, issue 3, 311-333

Abstract: Using a sample of Chinese listed firms from 2003 to 2017, our paper investigates how discretionary income smoothing affects crash risk. We find that discretionary income smoothing is positively correlated with crash risk the positive effect is robust to alternative empirical designs. In addition, discretionary income smoothing also predicts (reduces) the likelihood of future positive price jump, indicating that discretionary income smoothing generally forecasts fat-tailed stock price distributions. Our cross-sectional analysis suggests that the positive effect of discretionary income smoothing on crash risk is stronger in firms without institutional ownership, with poorer information environment and with higher agency conflicts.

Date: 2021
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DOI: 10.1080/16081625.2019.1600413

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Asia-Pacific Journal of Accounting & Economics is currently edited by Yin-Wong Cheung, Hong Hwang, Jeong-Bon Kim, Shu-Hsing Li and Suresh Radhakrishnan

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