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Stock liquidity and stock price crash risk

journal contribution
posted on 2017-08-01, 00:00 authored by Xin Chang, Y Chen, L Zolotoy
We find that stock liquidity increases stock price crash risk. To identify the causal effect, we use the decimalization of stock trading as an exogenous shock to liquidity. This effect is increasing in a firm's ownership by transient investors and nonblockholders. Liquid firms have a higher likelihood of future bad earnings news releases, which are accompanied by greater selling by transient investors, but not blockholders. Our results suggest that liquidity induces managers to withhold bad news, fearing that its disclosure will lead to selling by transient investors. Eventually, accumulated bad news is released all at once, causing a crash.

History

Journal

Journal of financial and quantitative analysis

Volume

52

Issue

4

Pagination

1605 - 1637

Publisher

Cambridge University Press

Location

Cambridge, Eng.

ISSN

0022-1090

eISSN

1756-6916

Language

eng

Publication classification

C Journal article; C1.1 Refereed article in a scholarly journal

Copyright notice

2017, michael G. Foster School of Business, University of Washington

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