Product Market Threats and Stock Crash Risk

Abstract

This paper examines the effect of product market threats on firms’ stock crash risk. Competitive pressure from the product market causes a firm to withhold negative information. When negative information is accumulated to a tipping point, the accumulated information all comes out at a time and leads to an abrupt and large decline in stock price. Using fluidity as the main measure of product market threats, our regressions find that firms facing more threats are more prone to stock crashes. This result is confirmed by an instrumental variable analysis and a difference-in-difference analysis with exogenous shock to market competition.