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Are financially constrained firms susceptible to a stock price crash?

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  • Guanming He
  • Helen Mengbing 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.

Suggested Citation

  • Guanming He & Helen Mengbing Ren, 2023. "Are financially constrained firms susceptible to a stock price crash?," The European Journal of Finance, Taylor & Francis Journals, vol. 29(6), pages 612-637, April.
    • Handle: RePEc:taf:eurjfi:v:29:y:2023:i:6:p:612-637
    DOI: 10.1080/1351847X.2022.2075280
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    Cited by:

    1. Jose, Amal & Bhaduri, Saumitra, 2024. "Promoter's share pledging and investment–The role of financial constraints," Finance Research Letters, Elsevier, vol. 62(PA).
    2. Guanming He & Helen Mengbing Ren, 2024. "Derivative disclosures and managerial opportunism," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(3), pages 384-419, March.
    3. Zhang, Yuyao & Li, Yinuo & Chen, Xingyu, 2024. "Does green bond issuance affect stock price crash risk? Evidence from China," Finance Research Letters, Elsevier, vol. 60(C).

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