Earnings Smoothing and Bankruptcy Risk in Liquidating Private Firms

Smooth earnings are preferred by managers and creditors because they represent a stable business operations as well as low loan default risks and thus creditors reward firms which have smooth earnings with better loan covenant terms and lower interest rates. Nonetheless, recent literature shows that earnings smoothing in public firms is associated with stock price crash risk. Using Altman Z” score to measure firm’s specific bankruptcy risk, this study examines the association between accrual earnings smoothing and bankruptcy risk in liquidating private firms in UK and finds that earnings smoothing significantly negatively affects those firms' bankruptcy risk. The finding implies that financially distressed firms engage with less earnings smoothing, possibly because they do not have the opportunity to engage in accrual earnings smoothing anymore. Nonetheless, further examination shows that these firms engage less with earnings smoothing because they are being monitored by external creditors, indicated by significantly high leverage during the last period before they are being liquidated.

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Capital Market Consequences of Audit Office Size: Evidence from Stock Price Crash Risk

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-18-015 ◽

2020 ◽

Vol 39 (2) ◽

pp. 1-26

Author(s):

Jeffrey L. Callen ◽

Xiaohua Fang ◽

Baohua Xin ◽

Wenjun Zhang

Keyword(s):

Capital Market ◽

Stock Price ◽

Bad News ◽

Crash Risk ◽

Public Firms ◽

Big 4 ◽

Empirical Tests ◽

Office Size ◽

Market Consequences ◽

Robust Evidence

SUMMARY This study examines the association between the office size of engagement auditors and their clients' future stock price crash risk, a consequence of managerial bad news hoarding. Using a sample of U.S. public firms with Big 4 auditors, we find robust evidence that local audit office size is significantly and negatively related to future stock price crash risk. The evidence is consistent with the view that large audit offices effectively detect and deter bad news hoarding activities in comparison with their smaller counterparts. We further explore two possible explanations for these findings, the Auditor Incentive Channel and the Auditor Competency Channel. Our empirical tests offer support for both channels. JEL Classifications: G12; G34; M49.

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Earnings Smoothing and Stock Price Crash Risk

SSRN Electronic Journal ◽

10.2139/ssrn.2538155 ◽

2014 ◽

Author(s):

Li Yao ◽

Changling Chen

Keyword(s):

Stock Price ◽

Crash Risk ◽

Earnings Smoothing

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The Information Role of Earnings Conference Call Tone: Evidence from Stock Price Crash Risk

Journal of Business Ethics ◽

10.1007/s10551-019-04326-1 ◽

2019 ◽

Cited By ~ 2

Author(s):

Xi Fu ◽

Xiaoxi Wu ◽

Zhifang Zhang

Keyword(s):

Stock Price ◽

Predictive Power ◽

Crash Risk ◽

Conference Calls ◽

Conference Call ◽

Public Firms ◽

Equity Incentives ◽

Disclosure Tone

Abstract This paper investigates whether and how the disclosure tone of earnings conference calls predicts future stock price crash risk. Using US public firms’ conference call transcripts from 2010 to 2015, we find that firms with less optimistic tone of year-end conference calls experience higher stock price crash risk in the following year. Additional analyses reveal that the predictive power of tone is more pronounced among firms with better information environment and lower managerial equity incentives, suggesting that extrinsic motivations for truthful disclosure partially explain the predictive power of conference call tone. Our results shed light on the long-term information role of conference call tone by exploring the setting of extreme future downside risk, when managers have conflicting incentives either to unethically manipulate disclosure tone to hide bad news or to engage in ethical and truthful communication.

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Earnings Smoothing: Does It Exacerbate or Constrain Stock Price Crash Risk?

CFA Digest ◽

10.2469/dig.v47.n9.1 ◽

2017 ◽

Vol 47 (9) ◽

Cited By ~ 1

Author(s):

Marla Howard

Keyword(s):

Stock Price ◽

Crash Risk ◽

Earnings Smoothing

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Tournament Incentives and Stock Price Crash Risk

Accounting Horizons ◽

10.2308/acch-52120 ◽

2018 ◽

Vol 32 (3) ◽

pp. 101-121 ◽

Cited By ~ 7

Author(s):

Ning Jia

Keyword(s):

Stock Price ◽

Crash Risk ◽

Senior Executives ◽

Public Firms ◽

Scheme Design ◽

External Monitoring ◽

Paper Advance ◽

Corporate Governance Quality ◽

The Relationship ◽

Robust Evidence

SYNOPSIS Using a large sample of U.S. public firms, I provide robust evidence that promotion-based tournament incentives, which are measured as the pay gaps between the CEO and other senior executives, are significantly and positively related to the firm's future stock price crash risk. The documented relationship is robust to controlling for corporate governance quality, and is attenuated for firms with a recent CEO turnover and for firms with more effective external monitoring. In contrast, the relationship is accentuated for firms that experience consecutive underperformance and for firms with greater opacity. Findings of this paper advance our understanding of the benefits and downsides of promotion incentives for non-CEO executives, and highlight the implications of inter-executive incentive scheme design for firm-specific stock price crash risk. JEL Classifications: G34; G12; G30.

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Earnings Comparability and Firm-Specific Stock Price Crash Risk

International Journal of Accounting and Financial Reporting ◽

10.5296/ijafr.v8i3.13659 ◽

2018 ◽

Vol 8 (3) ◽

pp. 174

Author(s):

Ruixue Du ◽

Shuo Li ◽

Ling Tuo ◽

Yu (Tony) Zhang

Keyword(s):

Stock Price ◽

Audit Quality ◽

Positive Association ◽

Income Smoothing ◽

Crash Risk ◽

Specific Information ◽

Market Outcomes ◽

Public Firms ◽

Corporate Managers ◽

Probability Of Informed Trading

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.

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Is Real Earnings Smoothing Harmful? Evidence from Firm-Specific Stock Price Crash Risk

Contemporary Accounting Research ◽

10.1111/1911-3846.12353 ◽

2017 ◽

Vol 35 (1) ◽

pp. 558-587 ◽

Cited By ~ 16

Author(s):

Inder K. Khurana ◽

Raynolde Pereira ◽

Eliza Xia Zhang

Keyword(s):

Stock Price ◽

Crash Risk ◽

Earnings Smoothing

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Is Bankruptcy Risk a Systematic Risk? Evidence from Pakistan Stock Exchange

ETIKONOMI ◽

10.15408/etk.v19i1.11248 ◽

2020 ◽

Vol 19 (1) ◽

pp. 51-62

Author(s):

Imran Umer Chhapra ◽

Iffat Zehra ◽

Muhammmad Kashif ◽

Raja Rehan

Keyword(s):

Asset Pricing ◽

Stock Returns ◽

Financial Distress ◽

Default Risk ◽

Stock Price ◽

Stock Exchange ◽

Systematic Risk ◽

Cross Sectional ◽

Bankruptcy Risk ◽

Distressed Firms

This study empirically investigates the relationship between default risk and cross-section of stock returns in the Pakistan Stock Exchange (PSX). Stock price data from all listed and delisted companies use to calculate monthly returns from 2001-2016. Ohlson's O-score is employed to measure exposure of firm to systematic deviation within bankruptcy risk. Besides, asset-pricing models like the Capital Asset Pricing Model (CAPM) and Fama French (FF) models are employed. Portfolios are sorted in deciles by default probability. This result finds that stocks of firms significantly exposed to not diversified Default Risk yield higher returns. Besides that, the FF models explain cross-sectional stock returns since factors incorporate information on financial distress and default. After that, the book-to-market equity factor is not significant in elucidating returns of distressed firms because of market inefficiency. Results have practical implications for portfolio managers and investors of an emerging economy in developing diversified portfolios during periods of uncertainty and market volatility.JEL Classifications: G12, G15, G33How to Cite:Chhapra, I. U., Zehra, I., Kashif, M., & Rehan, R. (2020). Is Bankruptcy Risk a Systematic Risk? Evidence from Pakistan Stock Exchange. Etikonomi: Jurnal Ekonomi, 19(1), 51 – 62. https://doi.org/10.15408/etk.v19i1.11248.

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