Stock Liquidity and Stock Price Crash Risk

Xin Chang, Yangyang Chen, Leon Zolotoy

Research output: Journal article publicationReview articleAcademic researchpeer-review

108 Citations (Scopus)


Foster School of Business, University of Washington. 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.
Original languageEnglish
Pages (from-to)1605-1637
Number of pages33
JournalJournal of Financial and Quantitative Analysis
Issue number4
Publication statusPublished - 1 Aug 2017

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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