Corporate Financing and Stock Price Crash Risk

  • Yangke Liu

Student thesis: Phd


In this thesis, I examine the impact of three corporate financing issues on the probability of firm equity value collapse, namely stock price crash risk. The thesis consists of three essays. In the first essay, I find that firms with a larger proportion of short-term debt have lower future stock price crash risk, consistent with short-term debt lenders playing an effective monitoring role in constraining managers' bad-news-hoarding behavior. The inverse relation between short-maturity debt and future crash risk is more pronounced for firms that are harder to monitor due to weaker corporate governance, higher information asymmetry, and greater risk-taking. These findings suggest that short-term debt substitutes for other monitoring mechanisms in curbing managerial opportunism and reducing future crash risk. Our study implies that short-maturity debt not only preserves creditors' interests, but also protects shareholders' wealth. The second essay empirically tests two opposing views on the relation between supplier financing and future stock price crash risk: monitoring versus concession. I present robust evidence that trade credit is negatively associated with firm-specific stock price crash risk, consistent with the view that trade credit, as an important source of short-term financing, effectively monitors buying firms and therefore constrains their bad-news-hoarding behavior. Further analyses reveal that the role of trade credit in mitigating stock price crash risk is more pronounced among firms that demand a higher level of monitoring such as those with weaker governance, less bank monitoring, lower market power, and higher distress risk. Overall, our results shed light on how trade credit shapes managerial disclosure incentives. In the third essay, I examine the effect of the deregulation of bank branch restrictions on nonfinancial firms' stock price crash risk. Most U.S. states lifted restrictions on intrastate branching from the 1970s to the 1990s, which improved bank monitoring and lending quality. I find robust evidence that the bank deregulation leads to lower levels of firms' stock price crash risk, consistent with branch reform improving bank monitoring efficiency and enabling banks to better constrain borrowers' bad-news-hoarding behavior. This mitigating effect is more pronounced for firms that are riskier and more reliant on external finance. Our study suggests that bank branch deregulation is beneficial for protecting nonfinancial firms' market value.
Date of Award31 Dec 2018
Original languageEnglish
Awarding Institution
  • The University of Manchester
SupervisorEdward Lee (Supervisor), Viet Dang (Supervisor) & Cheng Zeng (Supervisor)

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