Product Market Threats and Stock Crash Risk

58 Pages Posted: 1 Aug 2014 Last revised: 22 Nov 2017

Si Li

Wilfrid Laurier University - School of Business & Economics

Xintong Zhan

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: October 6, 2017

Abstract

This paper examines the effect of product market threats on firms’ stock crash risk. Competitive pressure from the product market aggravates managers’ incentive to withhold negative information. When negative information is accumulated to a tipping point, the accumulated information all comes out at a time and leads to an abrupt and large decline in stock price. Using a measure of product market threats, our regressions find that firms facing more threats are more prone to stock crashes. This result is confirmed by an instrumental variable analysis and a difference-in-difference analysis with an exogenous shock to market competition.

Keywords: Market competition; Product market threats; Stock crash risk; Tail risk; Bad news withholding

JEL Classification: G3, G12, G14, D4, L1

Suggested Citation

Li, Si and Zhan, Xintong, Product Market Threats and Stock Crash Risk (October 6, 2017). Available at SSRN: https://ssrn.com/abstract=2474135 or http://dx.doi.org/10.2139/ssrn.2474135

Si Li (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada

Xintong Zhan

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

HOME PAGE: http://sites.google.com/site/xtzhan1221/

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