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Are financially constrained firms susceptible to a stock price crash?

He, G.; Ren, H.M.

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Authors

H.M. Ren



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

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Publisher Licence URL
http://creativecommons.org/licenses/by-nc-nd/4.0/

Copyright Statement
© 2022 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group
This is an Open Access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives License (http://creativecommons.org/licenses/by-nc-nd/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited, and is not altered, transformed, or built upon in any way.





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