How Financial Constraints Affect Stock-Price Crash Risk

Financial crises and corporate scandals like those involving Enron, Worldcom, or Fannie Mae have triggered increased academic research into the probability of stock price crashes. Stock price crashes have a material impact on investor welfare, and so are of interest to investors making portfolio investment decisions. By understanding the factors that determine the variations in crash risk, investors can better predict and avoid future stock price crashes. In a recent paper, we examine whether and how financial constraints on companies affect the risk that their stock prices will crash. We define, per Lamont et al. (2001), financial constraints as frictions … Read more