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S. Bhojraj, M. Dantas, G. Gao, J. Piao and F. B. G. Silva: The Nature of Stock Price Crash Risk: Hoarding of Bad News or Non-Agency Uncertainty?

January 15, 2025

We reassess the longstanding bad news hoarding hypothesis that underlies the vast literature on the effects of financial reporting on firms’ stock price crash risk. We propose a series of tests to help distinguish between crash risks due to bad news hoarding visa -vis the underlying risk exposures of firms (non-agency uncertainty hypothesis). The three pillars of these tests are (i) to analyze both tails of the return distribution, (ii) to differentiate between isolated and coincident crashes and booms, and (iii) to account for investors’ expectations. Opacity is the only financial reporting quality proxy that survives the additional tests and is consistent with bad news hoarding. Our findings collectively provide a roadmap to better understand the underlying channels connecting financial reporting and crash risks.

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