THE INTERACTION BETWEEN ACCOUNTING FRAUD AND FINANCIAL PERFORMANCE INDICATORS IN EXPLAINING STOCK PRICE CRASH RISK: EVIDENCE FROM COMMERCIAL BANKS

Abstract

This study aims to explore the joint effect of accounting fraud and financial performance indicators on the crash risk of stock price for the banking industry. This study considers a dataset of 11 banks traded on the Tehran Stock Exchange and 6 banks traded on the Iraqi Stock Exchange for a period of 2015-2023. This study uses the discretionary accruals method to represent accounting fraud to measure the effect of crash risk of stock price. This study considers the NCSKEW and DUVOL methods to represent crash risk of stock price. This study finds that accounting fraud has a strong positive impact on crash risk of stock price for the respective country datasets. This study finds evidence that supports the concept of the existing bad news hoarding theory for banks. This study finds that accounting fraud affects crash risk of stock price to a higher level for Iraqi banks than Iranian banks. This confirms that institutional differences impact accounting fraud for crash risk of stock price datasets. This study considers control variables to develop a theoretical conceptual framework for better understanding of crash risk of stock price. This study finds that crash risk of stock price to a lower level for banks with higher size, age, and profits. This study finds that banks with higher leverage indicate a higher probability for crash risk of stock price. This study validates the analysis by utilizing the Beneish M-Score method to represent accounting fraud for crash risk of stock price. This study considers a CRASH dummy test to validate the analysis. This study contributes to the existing crisis theory for crash risk of stock price for banking industry by identifying three key points. First, this study introduces a theoretical concept that banking industry institutions impact accounting fraud for crash risk of stock price theory to advance future crisis theory for banking industry study requirements. This study explains that a banking industry study should focus on safety enforcement to develop transparency to enhance audit quality to develop banking industry stability for developing countries like Iraq for banking industry crisis theory. This study introduces a warning message to stakeholders to demand awareness to demand carefulness to demand prudence to demand caution while analyzing banking industry profits that banking industry profits induce for developing country crisis theory for banking industry. Taken together, the results contribute to a better understanding of the impact of accounting fraud on emerging market economies with respect to financial system integrity. © 2025, Social Sciences Research Society. All rights reserved.