Stock Liquidity and Stock Price Crash Risk
54 Pages Posted: 1 Nov 2013 Last revised: 8 Feb 2016
Date Written: February 6, 2016
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 non-blockholders. 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.
Keywords: Stock liquidity; Crash risk; Short-termism; Bad news hoarding
JEL Classification: G12, G14, G34
Suggested Citation: Suggested Citation