2017/07/25 by Xin Chang, Yangyang Chen, Leon Zolotoy · 498 citations
Business, Management and Accounting · Economics, Econometrics and Finance · #Auditing, Earnings Management, Governance #Business #Corporate Finance and Governance #Crash #Earnings #Economics #Finance #Financial Markets and Investment Strategies #Financial system #Market liquidity #Market maker #Monetary economics #Shock (circulatory) #Stock (firearms) #Stock market #Stock price
paper · pdf · doi:10.1017/s0022109017000473
published in Journal of Financial and Quantitative Analysis 52(4), 1605-1637 (Cambridge University Press)
openalex publication_date 2017/07/25 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/04
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.