Accounting Quality and Catastrophic Market Events

Market crashes are rare events with catastrophic consequences. Both the degree of information asymmetry and the risk premium associated with it increase on these days. This should affect equity prices. The increase in information asymmetry also reduces the liquidity at a time when it is particularly valued by investors. If accounting quality reduces the uncertainty concerning firms' value, the effect of catastrophic market events on both prices and liquidity should also be mitigated. Consistent with this prediction, I find that the price of firms with better accounting quality drops less during market crashes than the price of firms with worse quality. This result is not explained by a greater sensitivity to the Fama-French three factors by firms with low accounting quality. In addition, for most stocks, liquidity and intra-day price volatility deteriorate but this is exacerbated for firms with low accounting quality. These different effects are both statistically and economically significant.