The Dark Side of Asset Redeployability: Future Stock Price Crashes

Abstract

There is tension underlying whether asset redeployability, which refers to the salability of the corporate capital assets of the firm, shapes crash risk. On one hand, greater asset redeployability engenders liquidity benefits that should enhance financial stability, thereby mitigating future stock price crash risk. On the other hand, asset redeployability enables managers to opportunistically exploit asset sales to engage in upward real earnings management in order to hide bad news, which, in turn, increases future stock 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 real earnings undermines shareholders’ interests. Reinforcing that real 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. In additional evidence supporting the real earnings management channel, we find that asset redeployability is associated with a higher likelihood of just meeting or beating analyst forecasts, and recording of gains from 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 real earnings upward.

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

JEL Classification: G12, G14, G31, M41