Title: Financial distress risk and stock price crashes
Authors: Panayiotis Andreou - Cyprus University of Technology (Cyprus) [presenting]
Neophytos Lambertides - Cyprus University of Technology (Cyprus)
Christoforos Andreou - Cyprus University of Technology (Cyprus)
Abstract: A strong positive relationship between changes in firms distress risk and future stock price crashes is studied. Particularly, changes in distress risk can predict stock price crashes as far as three months ahead in the future. The results show that the crash-distress relationship is more pronounced when firms information asymmetry is higher, as captured by firms accounting opacity and stock liquidity. Interestingly, the findings support that the impact of distress risk changes on future stock price crashes is stronger: i) during investor sentiment-correction periods, and ii) periods with heightened market default risk. The finding are of interest to investors who wish to take long-run positions in the stock market because stock price crash risk cannot be easily diversified away. In this vein, investors should be cautious of a firms distress risk as short-term increases could be an early warning sign for forthcoming crash risk problems.