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Using a sample of Chinese listed firms over 2012–2018, we find robust evidence that management earnings forecasts bias is positively associated with crash risk, and this effect mainly exists in optimistic bias. Furthermore, higher levels of internal control can reduce management earnings forecasts bias and then reduce crash risk. Specifically, among the five components of internal control, risk assessment and communication are the main channels. In addition, the effect of internal control in weakening management earnings forecasts bias on stock price crash risk is more pronounced in firms with mandatory disclosure, timely disclosure and bad news. Our research shows that internal control plays an important role in mitigating stock price crash risk caused by management earnings forecasts bias.

Management Earnings Forecasts Bias, Internal Control, and Stock Price Crash Risk: New Evidence from China