Does Real Earnings Management Influence Stock Price Crash Risk? Evidence from Borsa Istanbul

Abstract

In this study, I examine whether real earnings management affects future stock price crash risk using 2,839 firm-year observations from Borsa Istanbul, with predictor variables measured from 2005 to 2024 and crash-risk outcomes measured from 2006 to 2025. Real earnings management (REM) is measured from abnormal production costs, abnormal discretionary expenditures, and abnormal operating cash flows, while crash risk is gauged by negative conditional skewness and down-to-up volatility. Higher REM is associated with higher values of both crash risk measures. The result persists when alternative proxies, first-difference models, firm fixed effects, and entropy-balanced observations are used. This study contributes to the REM literature by providing evidence from an emerging market with distinct market conditions and reporting practices. Consistent with the hypotheses concerning firm overvaluation and information asymmetry, the cross-sectional results show that the positive REM–crash risk association is stronger among overvalued firms and firms with greater information asymmetry. This finding supports the view that valuation pressure may strengthen incentives to delay bad news recognition, while opaque information environments make underlying problems more difficult for market participants to detect.