The Effects of Stock Price Crashes on Accounting Conservatism*

Abstract

Few studies have examined the causes of stock price crashes and their economic consequences. This study, using Chinese listed firms as a sample, investigates the impact of stock price crashes on accounting conservatism. The results show that accounting conservatism significantly increases after a stock price crash, with a more pronounced effect in firms with higher levels of external oversight. Our findings support both signaling and resource-dependence theory: after a crash, managers increase accounting conservatism to send a stronger positive signal, rebuild stakeholder confidence, and thereby mitigate the adverse valuation effects of the crash.