Corporate Zombification, Accounting Conservatism, and Stock Price Crash Risk: New Evidence from Emerging Market

The article examines the relationship between the degree of accounting conservatism and stock price crash risk in zombie firms. It investigates whether zombie firms delay their loss recognition by following conservative accounting practices. Next, it explores how conservative reporting behaviors influence the likelihood of firms’ stock price crashes. Finally, the study examines the moderating role of stock pledging in this relationship. Using panel data from 2011 to 2024, the study finds that zombie firms exhibit lower levels of accounting conservatism. Moreover, zombie firms that follow less conservative accounting are more vulnerable to stock price crash risks. The results further show that firms engaging in share pledging face even higher crash risks due to reduced conservatism. It addresses the endogeneity concern by using the propensity score matching technique to create a treatment group of zombie firms and a control group of non-zombie firms with comparable observable characteristics, enabling a more reliable estimation of the effects of accounting conservatism. To the authors’ knowledge, this work offers a novel contribution to the literature, offering new evidence on how corporate zombification impacts stock price crash risk using conservatism principles in an emerging economy like India. JEL Codes: G32, G31, G33, G38