The Effect of Free Cash Flows on Stock Crash Risk with Focused on the Role of Earnings Smoothing

Document Type : Original Article

Authors

1 Assistant Professor, Department of Accounting, University of Allameh Tabataba’i, Tehran, Iran

2 MSc. in Accounting, University of Allameh Tabataba’i, Tehran, Iran.

Abstract

With the expansion of the capital market in Iran, it is important to pay attention to the factors that have an effect on the decision-making of market participants and during recent years, stock price crash risk as in affective risks on companies been noted by shareholders and researchers. In this research, the effect of free cash flows on stock crash risk with focused on the role of earnings smoothing was investigated. In internal research, there have been many kinds of research emphasizing the relationship between earnings smoothing and stock price crash risk, but the relationship between cash flows and stock price crash risk is missing in internal research. Also, the moderating role of earnings management on this relationship has not been explained in the Iranian capital market so far. Therefore, based on the research literature in this field, it seems that the issue of the relationship between free cash flows and the stock price crash risk and the explanation of this relationship in the Iranian capital market is significant. The sample includes 161 companies listed on the Tehran Stock Exchange during the years 1394 to 1399. To quantify stock price crash risk, two criteria of negative stock skewness and up-down volatility were used. The results indicate that free cash flows have a positive and significant effect on stock price crash risk and earning smoothing also moderates this relationship negatively and significantly.

Keywords

References

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Financial Management Perspective
Volume 12, Issue 40
February 2023
Pages 29-48

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