Earnings quality and crash risk in China: an integrated analysis

Abstract

Purpose – The authors provide a comprehensive empirical examination on the impact of earnings quality on stock price crash risk in China.

Design/methodology/approach – The authors acknowledge and distinguish two-dimensional proxies for earnings quality – accounting-based (earnings management degree) and market-based (earnings transparency) known in accounting and finance literature.

Findings – The authors find that both generally indicate that better earnings quality is associated with less crashes. However, extremely high earnings transparency interacted with insider trading profit can also actually exacerbate stock price crashes.

Originality/value – This study is the first to highlight the pertinence of accounting-based measures to proxy for earnings quality in a fast-growing emerging market environment such as China.