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Product Market Threats and Stock Crash Risk

Author

Listed:
  • Si Li

    (Financial Services Research Centre, Lazaridis School of Business and Economics, Wilfrid Laurier University, Waterloo, Ontario N2L 3C5, Canada)

  • Xintong Zhan

    (CUHK Business School, The Chinese University of Hong Kong, Shatin, Hong Kong)

Abstract

This paper examines the effect of product market threats on firms’ stock crash risk. Competitive pressure from the product market aggravates managers’ incentive to withhold negative information. When negative information is accumulated to a tipping point, the accumulated information comes out all at once and leads to an abrupt and large decline in stock price. Using a measure of product market threats, our regressions find that firms facing more threats are more prone to stock crashes. This result is confirmed by an instrumental variable analysis and a difference-in-difference analysis with an exogenous shock to market competition.

Suggested Citation

  • Si Li & Xintong Zhan, 2019. "Product Market Threats and Stock Crash Risk," Management Science, INFORMS, vol. 65(9), pages 4011-4031, September.
    • Handle: RePEc:inm:ormnsc:v:65:y:2019:i:9:p:4011-4031
    DOI: 10.1287/mnsc.2017.3016
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