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

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