Accounting Policies and Price Stability under Market Disruption

• In Event: Auditing and financial accounting: Skepticism and Forecasting
  In Dialogue Session: Auditing and Financial Accounting: Skepticism and Forecasting

Abstract

This paper examines the role of informational transparency and corporate governance in strengthening price stability during market disruption. Using the mutual fund flow-driven price pressure as an exogenous shock that pushes down stock prices and disrupts price informativeness, we find that stocks with greater analyst coverage, lower analyst forecast dispersion, and higher stock liquidity are less affected by exogenous market disruptions. Further, we show that stronger
corporate governance, reflected in the presence of blockholders, and long-term institutional
investors, also helps mitigate the impact of exogenous price pressure. Interestingly, we find that incentivized CEOs with strong equity-based compensations tend to exacerbate the price impact of mutual fund fire sales. Finally, we find that firms respond to exogenous mispricing by reducing earnings management activities and practicing more conservative financial reporting.

Authors

• Jinglin Jiang, Rutgers Business School

• Vikram Nanda, rutgers business school

• Steven Chong Xiao, rutgers business school