Stock liquidity and stock price crash risk
Accepted version
Peer-reviewed
Repository URI
Repository DOI
Change log
Authors
Chang, X
Chen, Y
Zolotoy, L
Abstract
We find that stock liquidity increases stock price crash risk. To identify the causal effect, we use the decimalization of stock trading as an exogenous shock to liquidity. This effect is increasing in a firm’s ownership by transient investors and nonblockholders. Liquid firms have a higher likelihood of future bad earnings news releases, which are accompanied by greater selling by transient investors, but not blockholders. Our results suggest that liquidity induces managers to withhold bad news, fearing that its disclosure will lead to selling by transient investors. Eventually, accumulated bad news is released all at once, causing a crash.
Description
Keywords
stock liquidity, crash risk, short-horizon investors, bad news hoarding
Journal Title
Journal of Financial and Quantitative Analysis
Conference Name
Journal ISSN
1756-6916
Volume Title
52
Publisher
Cambridge University Press
Publisher DOI
Sponsorship
We thank Michael Chng, Ning Gong, Jarrad Harford, Elaine Hutson, John Lyon, Mark Maffett, Nadia Massoud, Spencer Martin, participants of the 2014 Auckland Finance Meeting and 2015 Macquarie Global Quantitative Research Conference, and seminar participants at Deakin University, Monash University, the University of Adelaide, and the University of Melbourne. We are especially grateful to the editor Hendrik Bessembinder and two anonymous referees for the insightful comments and suggestions which have significantly improved the paper. We are also grateful to Hans Stoll and Christoph Schenzler of Vanderbilt University for providing the relative effective spread data, Brian Bushee for sharing the institutional investor classification data, and Fotis Grigoris for excellent research assistance.