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Accruals and price crashes

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  • Wei Zhu

    (University of Illinois at Urbana-Champaign)

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.

Suggested Citation

  • Wei Zhu, 2016. "Accruals and price crashes," Review of Accounting Studies, Springer, vol. 21(2), pages 349-399, June.
    • Handle: RePEc:spr:reaccs:v:21:y:2016:i:2:d:10.1007_s11142-016-9355-1
    DOI: 10.1007/s11142-016-9355-1
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    More about this item

    Keywords

    Accruals; Crashes; Bad news hoarding; Default risk;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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