Stock Liquidity and Stock Price Crash Risk

54 Pages Posted: 1 Nov 2013 Last revised: 8 Feb 2016

See all articles by Xin (Simba) Chang

Xin (Simba) Chang

Nanyang Business School, Nanyang Technological University

Yangyang Chen

City University of Hong Kong (CityUHK) - Department of Accountancy

Leon Zolotoy

University of Melbourne - Melbourne Business School

Date Written: February 6, 2016

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 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

Chang, Xin and Chen, Yangyang and Zolotoy, Leon, Stock Liquidity and Stock Price Crash Risk (February 6, 2016). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2347759 or http://dx.doi.org/10.2139/ssrn.2347759

Xin Chang

Nanyang Business School, Nanyang Technological University ( email )

S3-01B-40 Nanyang Avenue
Singapore, 639798
Singapore

HOME PAGE: https://personal.ntu.edu.sg/changxin/

Yangyang Chen

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Leon Zolotoy (Contact Author)

University of Melbourne - Melbourne Business School ( email )

200 Leicester Street
Carlton, Victoria 3053 3186
Australia

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