Earnings Quality and Stock Crash Risk: A Study in Indonesia

Alverina, Jessica Clara; Rudiawarni, Felizia Arni; Harindahyani, Senny

doi:10.2478/foli-2025-0020

Abstract

Research background

Earnings is essential information for investors. Therefore, the quality of earnings influences optimal investment decisions. Poor earnings quality leads to wrong investment decisions and increases the risk of stock crashes, which are detrimental to shareholder prosperity. The Indonesia Stock Exchange (IDX), as a stock exchange in a developing country, faces issues with the quality of its reported earnings. This research seeks to provide empirical evidence regarding earnings quality and stock crash risk.

Purpose

This study aims to empirically examine the impact of earnings quality, which is proxied by earnings management and transparency, on stock price crash risk in Indonesia.

Research methodology

This study investigates all firms listed on the Indonesia Stock Exchange from 2019 to 2021 using a multivariate regression analysis.

Results

The results provide evidence that firms with higher earnings management are positively associated with higher stock crash risk. However, this study reveals interesting findings about the impact of earning transparency on stock crash risk in this time frame. Earnings transparency has a significantly positive impact on stock crash risk instead of a negative one. This study focuses on the 2019–2021 period, which coincides with the COVID-19 pandemic, so caution should be exercised when generalizing the findings to non-pandemic conditions.

Novelty

The results imply additional, potentially interesting extensions. In emerging countries, many external factors beyond the firm’s control affect stock crash risks, and these conditions strongly prove the existence of an inefficient stock market in Indonesia.

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