Author: Xie, Si
Title: The dark side of earnings response coefficient : the role of ERC in future stock crash risk prediction
Advisors: Cheng, C. S. Agnes (AF)
Ohlson, James A. (AF)
Degree: M.Phil.
Year: 2018
Subject: Hong Kong Polytechnic University -- Dissertations
Business forecasting
Disclosure in accounting
Department: School of Accounting and Finance
Pages: 82 pages
Language: English
Abstract: This study tries to explain individual crash risk from the perspective of valuation theory. We find that a higher Earnings Response Coefficient (ERC) predicts a higher probability of price crash than a lower ERC. This finding can be explained by investors' misevaluation of earnings persistence and systematic risk of the firm, which is also related to the bad news hoarding hypothesis. If managers hold back the bad news, this would prevent the investors from correcting their valuation of the systematic risk, hence resulting in a higher ERC and higher crash risk. Consistent with prior literature on earnings opacity, we find that the valuation theory could explain the increasing crash risk, which is further supported by cross-sectional analyses.
Rights: All rights reserved
Access: open access

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