Financial distress risk and stock price crashes

This study uses 462,678 monthly observations of US-listed firms for the period 1990–2018 to document a strong positive relationship between short-term changes in financial distress risk and future stock price crashes. result is economically significant as one interquartile increase main explanatory variable any month increases probability crash by 8.33% relative its mean value. The findings withstand controls large array variables, firm-fixed effect estimations, alternative definitions measures; they are also robust range tests conducted buttress against endogeneity concerns. conducts analyses demonstrating that distress-crash driven managerial opportunism seeks camouflage bad news has an adverse on firms' economic fundamentals. Accordingly, corroborate agency theory explanation impact offers practical insights investors, who should be vigilant firm's risk, sudden underscore withheld negative information pertinent problems.