Against the Gravity as a Jenga Tower? Asset Growth and Stock Price Crash Risk
76 Pages Posted: 14 Nov 2019 Last revised: 21 Sep 2020
Date Written: September 15, 2020
Does growth lead to stock price crashes? In this study, we find that total asset growth positively relates to future crash risk and the relationship is robust for various asset, liability, and equity components of the balance sheet. Consistent with the managerial empire-building incentive, agency problems tend to accentuate the asset growth-crash risk relationship while accounting conservatism attenuates the relationship, suggesting that not all growth is harmful. We also find corroborating evidence from overinvestment estimation and a quasi-natural experiment that reduces managers’ empire building incentive. Despite the popularity of studying asset growth and future stock returns in the literature, our focus on higher moments of returns sheds light on the consequences of bloated balance sheets for stock prices.
Keywords: Crash risk; Asset growth; Bad news hoarding; Agency problem; Conservatism
JEL Classification: G12, G30, M41
Suggested Citation: Suggested Citation