The Dark Side of Asset Redeployability: Future Stock Price Crashes

54 Pages Posted: 19 Jun 2017  

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: June 16, 2017

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

Suggested Citation

Chen, Yangyang and Ng, Jeffrey and Pittman, Jeffrey and Saffar, Walid, The Dark Side of Asset Redeployability: Future Stock Price Crashes (June 16, 2017). Available at SSRN: https://ssrn.com/abstract=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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