Firm Life Cycle and Stock Price Crash Risk

Abstract

This study examines the relation between firm life cycle and stock price crash risk. Consistent with the argumentation that heterogeneity in investor beliefs about firm fundamental values is highest during the introduction and growth stage, we find that crash risk peaks in these stages. Furthermore, this relation is stronger for firms without short interest, firms deriving more value from future growth opportunities and high performing growth firms. These findings provide additional support for the “heterogeneity in investor beliefs” hypothesis. We contribute to existing literature by incorporating an inherent yet dynamic firm characteristic, life cycle, into the crash risk prediction model.

Keywords: Crash Risk, Firm Life Cycle, Heterogeneity in Investor Beliefs, Valuation Uncertainty