Stock Price Crashes and Systematic Risk

Abstract

We show that firm systematic risk increases following stock price crashes. This occurs in both low- and high-beta companies and is robust to alternate proxies of systematic risk. Crashed firms face difficulty raising capital or obtaining loans, exacerbating default risk. Our results indicate that the increased systematic risk is due to increased default risk. There is no evidence to support information asymmetry as a channel for higher beta following crashes. We show that the increase in systematic risk results in higher costs for equity financing.

Keywords: Crash risk, Systematic risk, Default risk, Information asymmetry

JEL Classification: G11, G12, G14