Opportunism in crisis: Big baths and COVID-19 disclosure

We investigate the tools that managers use to conceal big baths in times of crisis. Our study is based on 7623 firm-year observations of A-share listed companies in China during the COVID-19 pandemic. The empirical evidence suggests that during the COVID-19 pandemic, managers are more likely to take advantage of the crisis to engage in big baths. Specifically, managers engaging in big baths tend to convey a more negative tone regarding the pandemic and utilize the pandemic for self-serving attribution in financial reports. Moreover, managers have a heightened motivation to use COVID-19 disclosures to conceal big baths driven by stronger opportunistic intent, particularly those occurring in the fourth quarter, leading to negative earnings surprises, or those involving non-goodwill asset accounts. The correlation between big baths and a negative pandemic tone is less pronounced for firms with greater transparency in disclosure, higher analyst attention, CEO duality, and higher management ownership. Furthermore, we find that using the COVID-19 pandemic as a cover can help mitigate the stock price crash risks associated with big baths. The findings draw stakeholder attention to the opportunistic nature of earnings manipulation and discretionary disclosures during the COVID-19 pandemic.