The Investigation of Mechanisms to prevent Stock Price Crash Risk

Abstract

<p>Purpose: The purpose of this study is to achieve empirical evidence related to the factors for preventing the stock price crash risk. Accordingly, we investigate financial reporting policies and capabilities of the independent auditors, two key areas affecting economic outcomes. To measure the company's financial reporting policies, we applied financial reporting transparency and accounting conservatism, and to measure auditory capabilities, we used auditor tenure and auditor industry specialization.</p><p>Methodology: in this article, we use a semi-empirical method based on information released by listed companies in Tehran Stock Exchange, in the period 1388 to 1394 and we use 113 firms for final analyses. In order to test the hypotheses, we use generalized linear regression and logistic regression.</p><p>Findings: The results show that the client auditor industry specialization has a significant negative relationship with all three risk factors. Also, no significant relationship was observed between auditor tenure and the first two first stock price crash risks, and a positive relationship between auditor tenure and the third-factor stock price crash risk was shown. There is a significant negative relationship between the degree of accounting conservatism and the first two factors of risk. Also, there is a significant negative relationship between financial reporting transparency and second and third factors.</p><p>Contribution: This study gives some of the mechanisms to shareholders and managers to reduce the stock price crash risk and is introduced three instruments including the auditor industry specialization, financial reporting transparency, and accounting conservatism to control stock price crash risk.</p>