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Financial distress risk and stock price crashes

Financial distress risk and stock price crashes
Financial distress risk and stock price crashes
This study uses 462,678 monthly observations of US-listed firms for the period 1990–2018 to document a strong positive relationship between short-term changes in financial distress risk and future stock price crashes. This result is economically significant as a one interquartile increase of the main explanatory variable in any month increases the probability of a stock price crash by 8.33% relative to its mean value. The findings withstand controls for a large array of variables, firm-fixed effect estimations, and alternative definitions of distress and crash risk measures; they are also robust to a range of tests conducted to buttress against endogeneity concerns. The study conducts analyses demonstrating that the positive distress-crash risk relationship is driven by managerial opportunism that seeks to camouflage bad news that has an adverse effect on firms' economic fundamentals. Accordingly, the findings corroborate an agency theory explanation for the impact of distress risk on stock price crashes. This study offers practical insights to investors, who should be vigilant of a firm's distress risk, as sudden short-term increases underscore withheld negative information pertinent to crash risk problems.
Agency problems, Bad news hoarding, Distress risk, Financial analysts, Firm-specific stock price crashes, Managerial opportunism
0929-1199
Andreou, Christoforos K.
7e3cbbe0-1d81-407d-aa00-acee91c04d9a
Andreou, Panayiotis C.
1ae214ef-6d64-4054-a833-e72143c7f467
Lambertides, Neophytos
72605971-9577-486d-9800-38a7f072a2c6
Andreou, Christoforos K.
7e3cbbe0-1d81-407d-aa00-acee91c04d9a
Andreou, Panayiotis C.
1ae214ef-6d64-4054-a833-e72143c7f467
Lambertides, Neophytos
72605971-9577-486d-9800-38a7f072a2c6

Andreou, Christoforos K., Andreou, Panayiotis C. and Lambertides, Neophytos (2021) Financial distress risk and stock price crashes. Journal of Corporate Finance, 67, [101870]. (doi:10.1016/j.jcorpfin.2020.101870).

Record type: Article

Abstract

This study uses 462,678 monthly observations of US-listed firms for the period 1990–2018 to document a strong positive relationship between short-term changes in financial distress risk and future stock price crashes. This result is economically significant as a one interquartile increase of the main explanatory variable in any month increases the probability of a stock price crash by 8.33% relative to its mean value. The findings withstand controls for a large array of variables, firm-fixed effect estimations, and alternative definitions of distress and crash risk measures; they are also robust to a range of tests conducted to buttress against endogeneity concerns. The study conducts analyses demonstrating that the positive distress-crash risk relationship is driven by managerial opportunism that seeks to camouflage bad news that has an adverse effect on firms' economic fundamentals. Accordingly, the findings corroborate an agency theory explanation for the impact of distress risk on stock price crashes. This study offers practical insights to investors, who should be vigilant of a firm's distress risk, as sudden short-term increases underscore withheld negative information pertinent to crash risk problems.

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Financial Distress Risk and Stock Price Crashes - Accepted Manuscript
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Euro Fin Management - Andreou - Unconventional monetary policy and international equity capital flows to emerging - Version of Record
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More information

Accepted/In Press date: 28 December 2020
e-pub ahead of print date: 6 January 2021
Published date: 1 April 2021
Additional Information: Publisher Copyright: © 2020 Elsevier B.V. Copyright: Copyright 2021 Elsevier B.V., All rights reserved.
Keywords: Agency problems, Bad news hoarding, Distress risk, Financial analysts, Firm-specific stock price crashes, Managerial opportunism

Identifiers

Local EPrints ID: 452368
URI: http://eprints.soton.ac.uk/id/eprint/452368
ISSN: 0929-1199
PURE UUID: f454a256-b1cf-47fb-870d-40737123288e
ORCID for Christoforos K. Andreou: ORCID iD orcid.org/0000-0002-5395-4807

Catalogue record

Date deposited: 08 Dec 2021 18:48
Last modified: 27 Apr 2022 02:20

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Contributors

Author: Panayiotis C. Andreou
Author: Neophytos Lambertides

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