PurposeThe authors provide a comprehensive empirical examination on the impact of earnings quality on stock price crash risk in China.Design/methodology/approachThe 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.FindingsThe 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/valueThis 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.
We examine the relation between a firm's equity R2 and the pricing and design of its debt securities. We find that firms with less synchronous stock returns are associated with a higher cost of debt after controlling for default and liquidity risks. Bonds issued by low synchronicity issuers also experience larger price reactions to information signals provided by equity analysts. Further analysis demonstrates that lower synchronicity is associated with cross‐sectional variation in the use of call provisions and with split S&P and Moody's bond ratings. Contrary to conventional interpretation, these results suggest that low R2 reflects inferior information transparency and higher information risk.
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