Asset Redeployability and Stock Price Crash Risk

Abstract

Asset redeployability, which is the salability of corporate capital assets, can shape crash risk. On the one hand, asset redeployability enables managers to opportunistically exploit asset transactions to manage earnings and hoard bad news, which in turn increases future stock price crash risk. On the other hand, asset redeployability engenders liquidity benefits that should mitigate future stock price crash risk. Using a novel measure of asset redeployability by Kim and Jung (2017), we find that, on average, asset redeployability is positively associated with stock price crash risk, suggesting that using redeployable assets to manipulate earnings undermines shareholders’ interests. Moreover, we find that this association is stronger for firms experiencing greater internal or external pressure to manage earnings, further confirming that asset transaction earnings management explains the positive association between asset redeployability and stock price crash risk. We contribute to extant research by showing a downside of asset redeployability stemming from managers’ incentives to suppress bad news, particularly when internal or external forces motivate them to manage earnings upward.

Keywords: Asset redeployability; Stock price crash risk; Bad news hoarding; Asset transactions

JEL Classification: G12, G14, G31, M41