Are financially constrained firms susceptible to a stock price crash?

He, G.; Ren, H.M.

Abstract

This study investigates whether and how financial constraints on firms affect the risk of their stock price crashing. We find strong evidence that financial constraints increase future stock price crash risk. This finding is robust to using two quasi-natural experiments to control for potential endogeneity. We also provide evidence to suggest that bad news hoarding and default risk explain the crash risk of financially constrained firms. Cross-sectional analysis reveals that the positive relation between financial constraints and future crash risk is more prominent for firms with weak corporate governance. Our study is of interest to investors as well as other stakeholders concerned about firms’ creditworthiness and viability.

Citation

He, G., & Ren, H. (2023). Are financially constrained firms susceptible to a stock price crash?. European Journal of Finance, 29(6), 612-637. https://doi.org/10.1080/1351847x.2022.2075280

• Journal Article Type: Article
• Acceptance Date: May 4, 2022
• Online Publication Date: May 23, 2022
• Publication Date: 2023
• Deposit Date: May 4, 2022
• Publicly Available Date: May 23, 2022
• Journal: The European Journal of Finance
• Print ISSN: 1351-847X
• Electronic ISSN: 1466-4364
• Publisher: Taylor and Francis Group
• Peer Reviewed: Peer Reviewed
• Volume: 29
• Issue: 6
• Pages: 612-637
• DOI: https://doi.org/10.1080/1351847x.2022.2075280
• Public URL: https://durham-repository.worktribe.com/output/1207309