Asset Redeployability and Bad News Hoarding: Evidence from Stock Price Crash Risk

57 Pages Posted: 19 Jun 2017 Last revised: 15 Feb 2019

See all articles by Yangyang Chen

Yangyang Chen

Hong Kong Polytechnic University - Faculty of Business

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Walid Saffar

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: February 13, 2019

Abstract

There is tension underlying whether asset redeployability, which refers to the salability of corporate capital assets, shapes crash risk. On one hand, asset redeployability enables managers to opportunistically exploit asset sales to manage earnings upwards to hoard bad news, which, in turn, increases future stock price crash risk. On the other hand, greater asset redeployability engenders liquidity benefits that should mitigate future stock price crash risk. We find that, on average, asset redeployability is positively associated with stock price crash risk, suggesting that relying on redeployable assets to orchestrate upward earnings undermines shareholders’ interests. Reinforcing that asset sales earnings management explains the positive association between asset redeployability and stock price crash risk, we find that this association is stronger for firms experiencing greater internal and external pressure to manage earnings. Additionally, we continue to find that the positive association persists after the Sarbanes-Oxley Act of (2002) was passed, reinforcing the difficulties in constraining bad news hoarding via asset sales. We contribute to extant research by providing evidence implying that asset redeployability has a dark side stemming from managers’ incentives to suppress bad news, particularly when internal and external forces motivate them to manage earnings upward.

Keywords: Asset Redeployability, Stock Price Crash Risk, Bad News Hoarding, Asset Sales

JEL Classification: G12, G14, G31, M41

Suggested Citation

Chen, Yangyang and Ng, Jeffrey and Pittman, Jeffrey A. and Saffar, Walid, Asset Redeployability and Bad News Hoarding: Evidence from Stock Price Crash Risk (February 13, 2019). Available at SSRN: https://ssrn.com/abstract=2988119 or http://dx.doi.org/10.2139/ssrn.2988119

Yangyang Chen

Hong Kong Polytechnic University - Faculty of Business ( email )

9/F, Li Ka Shing Tower
The Hong Kong Polytechnic University
Hong Kong, Hung Hom, Kowloon M923
China

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Jeffrey A. Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

Walid Saffar (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Li Ka Shing Tower
Hong Hum
Kowloon
Hong Kong

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