The Effect of Expense Recognition on Future Stock Price Crash Risk

This study examines whether different patterns of expense recognition due to imperfect matching affect future stock price crash risk. A firm experiences a stock price crash when a large amount of hidden firm-specific bad news arrives at the stock market at once. Following Dichev and Tang (2008), I identify three expense recognition patterns: contemporaneous expense recognition, in which costs belonging to the current period are expensed in the current period; accelerated expense recognition, in which costs belonging to the current period are expensed in the previous period; and delayed expense recognition, in which costs belonging to the current period are expensed in the next period. I hypothesize that different expense recognition patterns affect transparency and stock price crash risk differently. I find that stock price crash risk increases with delayed expense recognition and decreases with accelerated expense recognition. This result suggests that expense recognition patterns play an important role in detecting managers' revelation and suppression of bad news