Relationship between Stock Price Crash Risk and Structure of Financial Statements

Document Type : Original Article

Authors

1 MSc in Industrial Engineering-Financial Systems, AmirKabir Univercity of Technology, Tehran, Iran .

2 Associate Prof, Department of Industrial Engineering, AmirKabir Univercity of Technology, Tehran, Iran.

3 MSc in Industrial Engineering-Financial Systems, AmirKabir Univercity of Technology, Tehran, Iran.

Abstract

One of risks that any investor encounters when entering the capital market, is stock price crash risk. In this paper, we investigate the relationship between stock price crash risk and structure of financial statements, using data from 115 firms in Tehran Stock Exchange at the period of 2001 to 2017 Solar Hijri, selecting 26 firms or 416 annual observations from them and studying 75016 daily stock prices. The results show that, there is a significant relationship between stock price crash risk and the structure of financial statements. This means, the financial statements that prepared more conservatively, will have lower stock price crash risk. In addition, by dividing the stock price returns into two parts, the returns on the company's activity and second part, the returns due to the systematic market risk at 95% confidence level, the present study showed that, the major part of the stock price returns during this period, arising from systematic risk changes (fluctuations in some factors like exchange rate and inflation). This is justified by the desire of managers to overcome the situation and financial statements in order to better reflect the circumstances of the company and not provide them conservatively.

Keywords

References

  1. Aboutalebi, M. ALinejad Saroukalayi, M. (2017). Investigating the Comparability of Financial Statements in Relation with the Stock Price Crash Risk in Companies Admitted to the Tehran Stock Exchange. Third International Management and Industrial Engineering Conference. (In Persian)
  2. Ahmed, A. S., & Duellman, S. (2011). Evidence on the Role of Accounting Conservatism in Monitoring Managers’ Investment Decisions. Accounting & Finance, 51(3), 609-633.
  3. Andreou, P. C., Antoniou, C., Horton, J., & Louca, C. (2016). Corporate Governance and Firm‐Specific Stock Price Crashes. European Financial Management, 22(5), 916-956.
  4. Ball, R. (2009). Market and Political/Regulatory Perspectives on the Recent Accounting Scandals. Journal of Accounting Research, 47(2), 277-323.
  5. Basu, S. (1997). The Conservatism Principle and the Asymmetric Timeliness of Earnings1. Journal of Accounting and Economics, 24(1), 3-37.
  6. Callen, J. L., & Fang, X. (2015). Short Interest and Stock Price Crash Risk. Journal of Banking & Finance, 60, 181-194.
  7. Chen, J., Chan, K. C., Dong, W., & Zhang, F. (2017). Internal Control and Stock Price Crash Risk: Evidence From China. European Accounting Review, 26(1), 125-152.
  8. Chen, J., Hong, H., & Stein, J. C. (2001). Forecasting Crashes: Trading Volume, Past Returns, and Conditional Skewness in Stock Prices. Journal of Financial Economics, 61(3), 345-381.
  9. Diether, K. B., Lee, K. H., & Werner, I. M. (2009). It's SHO Time! Short‐Sale Price Tests and Market Quality. The Journal of Finance, 64(1), 37-73.
  10. Foroughi, D. Amiri, H. Mirzae, M (2012). The Impact of Opacity in Financial Reporting on the Future Stock Price Crash Risk of Listed Companies in Tehran Stock Exchange. Journal of Financial Accounting Research, 4, 15-40. In Persian
  11. Hutton, A. P., Marcus, A. J., & Tehranian, H. (2009). Opaque Financial Reports, R2, and Crash Risk. Journal of Financial Economics, 94(1), 67-86.
  12. Khan, M., & Watts, R. L. (2009). Estimation and Empirical Properties of a Firm-Year Measure of Accounting Conservatism. Journal of Accounting and Economics, 48(2), 132-150.
  13. Kim, Y., Li, H., & Li, S. (2014). Corporate Social Responsibility and Stock Price Crash Risk. Journal of Banking & Finance, 43, 1-13.
  14. Kothari, S. P., Shu, S., & Wysocki, P. D. (2009). Do Managers Withhold Bad News? Journal of Accounting Research, 47(1), 241-276.
  15. LaFond, R., & Watts, R. L. (2008). The Information Role of Conservatism. The Accounting Review, 83(2), 447-478.
  16. Miller, E. M. (1977). Risk, Uncertainty, and Divergence of Opinion. The Journal of Finance, 32(4), 1151-1168.
  17. Wei, W., Mao, Y., & Wang, B. (2016). Twitter Volume Spikes and Stock Options Pricing. Computer Communications, 73, 271-281.
  18. Talebnia, G. Rajabdari, H (2019) ., The Effect of Audit Committee on Stock Crash Risk: With Voluntary Disclosure of Ethics. Journal of Financial Accounting Research, 35, 95-110. (In Persian)

Files

Share

How to cite

Statistics