Accounting Conservatism and Stock Price Crash Risk: Firmlevel Evidence

Using a large sample of U.S. firms during 1964 2007, we find that conditional conservatism is associated with a lower likelihood of a firm's future stock price crashes. This finding holds for multiple measures of conditional conservatism and crash risk and is robust to controlling for other known determinants of crash risk and firm fixed effects. Moreover, we find that the relation between conservatism and crash risk is more pronounced for firms with higher information asymmetry. Overall, our results are consistent with the notion that conditional conservatism limits managers' incentive and ability to overstate performance and hide bad news from investors, which, in turn, reduces stock price crash risk. Prudence comptable et risque d'effondrement boursier donn ees recueillies aupr es des soci et es R ESUM E En analysant un vaste echantillon de soci et es des Etats Unis sur la p eriode s' echelonnant de 1964 a 2007, les auteurs constatent que la prudence conditionnelle est associ ee a une probabilit e moins grande d'effondrement futur du cours de l'action d'une soci et e. L'application de diff erents indicateurs de prudence conditionnelle et de risque d'effondrement confirme cette observation qui r esiste au controle d'autres d eterminants connus du risque d'effondrement et des effets fixes de l'entreprise. De plus, les auteurs constatent que la relation entre la prudence et le risque d'effondrement est plus accentu ee dans le cas de soci et es pour lesquelles l'asym etrie de l'information est plus marqu ee. Dans l'ensemble, les r esultats obtenus par les auteurs accr editent la notion selon laquelle la prudence conditionnelle limite la propension des gestionnaires a sur evaluer la performance et a dissimuler les mauvaises nouvelles aux investisseurs et la possibilit e qu'ils ont de le faire, ce qui r eduit en retour le risque d'effondrement des cours.  Sudipta Basu. An earlier version of this paper was presented at the 2012  The authors would like to thank Mary Barth (EAA discussant) Sudipta Basu, Paul Brockman, Zhihong Chen, Yuyan Guan, Mo Khan, Kalin Kolev (Lehigh University discussant) Yinghua Li, Patricia O'Brien, Gord Richardson, Steve Salterio, Dan Segal, Shyam Sunder, Ke Wang, Zheng Wang, Greg Waymire (CAR discussant) Franco Wong, Yong Yu, the anonymous reviewers, and participants of research workshops and/or PhD seminars at City University of Hong Kong, Concordia University, Fudan University, Hong Kong Baptist University, Lehigh University, Nanjing University, National Taiwan University, National University of Singapore, Shanghai University of Finance and Economics, the 2012 Annual Congress of EAA, and the 27th Annual CAR Conference for their useful comments. J. B. Kim acknowledges partial financial support for this research from the Social Sciences and Humanities Research Council of Canada via the Canada Research Chair program and Accounting Corporate Governance Unit at City University of Hong Kong. L. Zhang acknowledges financial support from the Faculty Research Development Program of the John Molson School of Business and the Start up grant of City University of Hong Kong.  3846.12112