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Corporate governance, earnings quality and idiosyncratic crash risk during the 2007–2008 financial crisis

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  • da Silva, Paulo Pereira

Abstract

This study explores the time-varying nature of the association between financial disclosure quality, corporate governance, and crash risk. Specifically, it evaluates the relevance of the above-mentioned variables in alleviating the abnormal components of crash risk that emerge during periods of mounting mistrust. Our empirical design takes advantage of the 2008 financial crisis as a sudden and negative exogenous shock that affected overall trust in capital markets. This near-natural experiment enables the examination of the influence of accounting quality and corporate governance on abnormal crash risk arising during distress periods, using a sample of 1361 firms from developed countries. While pre-crisis accounting opacity fueled the abnormal component of crash risk associated with the crisis, corporate governance practices had virtually no effect. Our interpretation is that perceived integrity compounded by firms by way of financial disclosure quality bolsters investor confidence in the firms’ financial information during a crisis, thereby attenuating crash risk.

Suggested Citation

  • da Silva, Paulo Pereira, 2019. "Corporate governance, earnings quality and idiosyncratic crash risk during the 2007–2008 financial crisis," Journal of Multinational Financial Management, Elsevier, vol. 51(C), pages 61-79.
    • Handle: RePEc:eee:mulfin:v:51:y:2019:i:c:p:61-79
    DOI: 10.1016/j.mulfin.2019.07.002
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    Citations

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    Cited by:

    1. Scheckenbach, Isabel & Wimmer, Maximilian & Dorfleitner, Gregor, 2021. "The higher you fly, the harder you try not to fall: An analysis of the risk taking behavior in social trading," The Quarterly Review of Economics and Finance, Elsevier, vol. 82(C), pages 239-259.
    2. Faiza Zulfiqar & Najam Us Sahar & Raja Nabeel-Ud-Din Jalal & Muhammad Akhtar & Um-E-Roman Fayyaz & Michelina Venditti, 2022. "Nexus Between Financial Crises, Corporate Governance and Future Stock Price Crash Risk," SAGE Open, , vol. 12(4), pages 21582440221, October.
    3. Paul Olojede & Olayinka Erin, 2021. "Corporate governance mechanisms and creative accounting practices: the role of accounting regulation," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 18(3), pages 207-222, September.

    More about this item

    Keywords

    Crash risk; Trust; Accounting opacity; Corporate governance;
    All these keywords.

    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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