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The effect of income smoothing on crash risk: A cross-country analysis

Year: 2025

Type: article

Abstract: This paper analyzes financial data from 42 countries to explore the relationship between income smoothing and stock price crash risk in an international context. The empirical findings indicate a positive association between income smoothing and crash risk, reinforcing the idea that it contributes to increased information opacity. The cross-country analysis reveals that this effect is intensified in regions characterized by weaker investor protection, lower transparency, and underdeveloped capital markets. Conversely, income smoothing significantly mitigates crash risk in countries with weak contract enforceability. These results underscore the vital role of institutional environments in shaping managerial incentives and behaviors, suggesting that stronger governance frameworks can alleviate the negative impacts of income smoothing on capital markets.

Source: International Review of Economics & Finance

DOI: 10.1016/j.iref.2025.104778

Authors: Wei Wu, Zhongyi Xiao, Guangneng Zhang, Yuxiang Zhong

Institutions: Southwest University of Political Science & Law, Huazhong University of Science and Technology

Language: English

Topic: Auditing, Earnings Management, Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

SDGs: Decent work and economic growth, Peace, justice, and strong institutions

Open Access status: gold

Estimated APC paid: $1,930