Are Financially Constrained Firms Susceptible to a Stock Price Crash?
61 Pages Posted: 18 Aug 2017 Last revised: 22 Jun 2020
Date Written: August 17, 2017
This study investigates whether and how financial constraints on firms affect the risk of their stock prices crashing. We find strong evidence that financial constraints increase future stock price crash risk. This finding is robust to using a dynamic panel generalized method of moments (GMM) estimator and two quasi-natural experiments to control for potential endogeneity. Cross-sectional analyses reveal that the positive relation between financial constraints and future crash risk is more prominent for firms with high abnormal accruals or with weak corporate governance and less pronounced for firms that commit tax avoidance or have a high credit rating. Our study provides the implications of financial constraints on future extreme negative stock returns and is of interest to investors as well as other stakeholders concerned about firms’ creditworthiness and viability.
Keywords: financial constraints, crash risk, bad news hoarding, default risk, accruals, tax avoidance, corporate governance, credit rating
JEL Classification: G10, G34, M41
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