Stock Liquidity and Stock Price Crash Risk

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 likeliho...

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Bibliographic Details
Published inJournal of financial and quantitative analysis Vol. 52; no. 4; pp. 1605 - 1637
Main Authors Chang, Xin, Chen, Yangyang, Zolotoy, Leon
Format Journal Article
LanguageEnglish
Published New York, USA Cambridge University Press 01.08.2017
CAMBRIDGE UNIVERSITY PRESS
Subjects
Institutional investments
Prices
Quantitative analysis
Skewness
Stock exchanges
Stock prices
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Summary: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.
Bibliography:ObjectType-Article-1
SourceType-Scholarly Journals-1
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ISSN:0022-1090
1756-6916
DOI:10.1017/S0022109017000473