Stock price crash risk and unexpected earnings thresholds

Abstract

Purpose The purpose of this paper is to examine stock price crash risk (SPCR) as a function of meeting or missing three earnings thresholds – reporting a profit (earnings level), reporting an earnings increase (earnings change) and meeting analysts’ forecasts (earnings expectation). Design/methodology/approach The authors rely upon the research design of Herrmann et al. (2011) to identify the incremental impact of the earnings level and earnings change benchmarks on SPCR, after controlling for the effects of meeting or missing analysts’ expectations. Findings The authors find that meeting analysts’ expectations is negatively associated with SPCR, and this relationship strengthens with the magnitude of the unexpected earnings. However, the authors find little evidence of incremental threshold effects to suggest that earnings level and earnings change benchmarks are critical thresholds with respect to SPCR. Our results are robust after including a number of control variables. Originality/value This study contributes to the literature that investigates determinants of SPCR while simultaneously providing new evidence to conclusions that analysts’ earnings forecast is at the top of the earnings benchmark hierarchy.

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