Do <scp>Firm?Specific</scp> Stock Price Crashes Lead to a Stimulation or Distortion of Market Information Efficiency?*

Unlike prior research that focuses on determinants of firm-specific stock price crashes (SPCs), we study the consequences SPCs market information efficiency. The tension underlying our question stems from two competing explanations. As an unanticipated shock, a SPC could stimulate (distort) efficiency by triggering investor rational attention (opinion divergence). Our identification strategy involves difference-in-differences analysis in which firms treatment sample are propensity score matched with non-SPC industry-peer control sample, as well placebo tests for falsification. Consistent stimulation effect, find increase earnings response coefficient and decrease post-earnings announcement drift, pre- to post-SPC period, firms, but not firms. Further analyses reveal attract increased attention, reflected greater analyst coverage more access firms’ online financial filings following such event. Using mutual fund flow redemption pressure based hypothetical sales exogenous shock SPCs, provide evidence corroborating causal interpretation main findings. Collectively, suggests can bringing about positive externalities stimulating This article is protected copyright. All rights reserved.