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

See all articles by Siu Kai Choy

Siu Kai Choy

King's College London

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Ying Zheng

Sun Yat-sen University

Date Written: September 15, 2020

Abstract

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

Choy, Siu Kai and Lobo, Gerald J. and Zheng, Ying, Against the Gravity as a Jenga Tower? Asset Growth and Stock Price Crash Risk (September 15, 2020). Available at SSRN: https://ssrn.com/abstract=3481709 or http://dx.doi.org/10.2139/ssrn.3481709

Siu Kai Choy (Contact Author)

King's College London ( email )

Strand
London, WC2R 2LS
United Kingdom

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

Ying Zheng

Sun Yat-sen University ( email )

Guangdong Province
China

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