Overvaluation and stock price crashes: The effects of earnings management.

摘要

Managers have various incentives to opportunistically withhold bad news from investors because of career concerns, compensation contracts, litigation risks, earnings targets, and empire building (Graham, Harvey, and Rajgopal, 2005; Kothari, Shu, and Wysocki, 2009; Ball, 2001, 2009). Jin and Myer (2006) create the bad news hoarding theory which suggests when managers hide bad news for extended periods of time, negative information is likely to be stockpiled within the firm. When managers' incentives for hiding bad news collapse or when the accumulation of bad news reaches a critical threshold level, all of the hitherto undisclosed negative firm-specific shocks become public at once, resulting in an abrupt decline in stock prices.;This study attempts to investigate whether substantial overvalued firms with managers' high earnings management (EM) is associated with future stock price crash risk. Using a large sample of U.S. public firms from the years 1995 to 2011, I find robust evidence that extreme overvaluation with high EM is positively associated with one-year ahead stock price crash risk. The results are consistent with Jensen's (2004, 2005) argument that when a firm becomes substantially overvalued it sets up organizational forces and incentives that are highly likely to impair the value of the firm. Because EM adversely affects information quality of financial statements and real earnings management (REM) is not economic optimal, substantial overvaluation with high EM incentivizes managers to hoard bad news. The hoarding and accumulation of negative information for extended periods leads to stock price crashes.;The results are robust to alternative proxies of crash risk and EM, and hold after controlling for endogeneity. The effects are more pronounced when firms engage in REM, in the post-SOX period, for firms with small size or low analyst coverage. In addition, consistent with Badertscher's (2011) finding that the duration of overvaluation affects managers' EM choices, I find in the early stages of overvaluation, accrual earnings management (AEM) is positively associated with future stock price crash risk whereas in the late stages of overvaluation, REM is positively associated with future stock price crash risk. Finally, I find that substantial overvaluation with high EM is negatively associated with future stock price jumps.