Optimistic Bias Of Earnings Forecast,Internal Control And Stock Price Crash Risk

Stock price crash refers to the phenomenon that the stock price of a company falls sharply in a short time,which is common in the capital market.Stock price crash will damage the interests of investors and affect the healthy development of the financial market,which may have a huge impact on the orderly development of the real economy.Therefore,it has become a research topic of great concern in the economy,finance and management at home and abroad.The research on the influencing factors of stock price crash risk at home and abroad mainly focuses on internal factors such as management characteristics,controlling shareholders,information disclosure,and external factors such as analysts,institutional investors,external audit,media supervision and so on,which has formed the comparatively rich research results.In terms of information disclosure,most studies start from the perspective of formal periodical financial reports.However,as part of the information disclosure of listed companies,there are few studies on the impact of earnings forecast issued by management on stock price crash risk.In China,earnings forecast is designed to make up for the lack of timeliness of periodic reports,to release the risk of sharp fluctuations in earnings to the public in advance,to alleviate information asymmetry and protect the interests of investors.However,unlike mandatory financial reports,the earnings forecast by management does not need to be audited by professional institutions,which leaves a choice for managerial self-interested manipulative disclosure.On the contrary,it will exacerbate the degree of information asymmetry between investors and companies.Many studies show that managers tend to issue earnings forecast with optimistic bias for their own self-interest.So,does the optimistic bias of earnings forecast increase stock price crash risk? This is the first question studied in this paper.Internal control is a series of rules and procedures designed by the management and required to be implemented by all employees,aiming at reasonably ensuring the reliability of financial reports,improving the operating efficiency and compliance of enterprises.Over the past decade,internal control has been gradually developed in China.Regulators have successively issued a series of laws and regulations to strengthen the internal control of listed companies.Listed companies are also actively improving the effectiveness of the company's internal control.Effective internal control can play a governance role to restrain the opportunistic behavior of management and alleviate information asymmetry.Therefore,the other two important research questions in this paper are whether effective internal control can restrain stock price crash risk and mitigate the negative impact of the optimistic bias of earnings forecast on stock price crash risk.In order to answer the above questions,this paper firstly combs the relevant literature at home and abroad to clarify the causes of stock price crash risk.Then,based on information asymmetry theory,principal-agent theory and behavioral finance theory,this paper makes theoretical analysis and puts forward corresponding research hypothesis.On this basis,we select Shanghai and Shenzhen A-share listed companies from 2012 to 2017 as samples to construct regression model,and empirically test the relationship amongst the optimistic bias of earnings forecast,internal control and stock price crash risk.The findings are as follows:(1)The stock price crash risk is positively correlated with optimistic bias of earnings forecast,that is,the bigger optimistic bias of earnings forecast is,the greater stock price crash risk is.(2)The stock price crash risk is negatively correlated with effectiveness of internal control,that is,the more effective the internal control is,the smaller the stock price crash risk is.(3)The effectiveness of internal control can alleviate the positive correlation between the stock price crash risk and the optimistic bias of earnings forecast to a certain extent,that is,effective internal control can play a governance role to reduce the negative effect of managerial opportunism.(4)According to the system background of our country,the optimistic bias of earnings forecast is divided into compulsory disclosure group and voluntary disclosure group.The study finds that in compulsory disclosure group,the positive correlation between stock price crash risk and optimistic bias of earnings forecast is more significant,and effective internal control can better alleviate the positive correlation between them.(5)Grouping according to the timeliness,the positive correlation between the stock price crash risk and optimistic bias of earnings forecast is more significant in the sample with stronger timeliness,and the effective internal control can alleviate the positive correlation between them.(6)Grouping according to the type of news,the positive correlation between the stock price crash risk and optimistic bias of earnings forecast is more significant in the sample with bad news,and the effective internal control can alleviate the positive the positive correlation between them.Finally,according to the conclusions of this paper,the following suggestions are put forward:(1)The government should further improve the earnings forecast disclosure system.(2)Investors should be alert to the negative effects of optimistic bias in earnings forecasts.(3)The government and enterprise should pay attention to the construction of internal control to improve the effectiveness of internal control.