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 aggravates managers’ incentive 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 a 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 an exogenous shock to market competition.

Keywords: Market competition; Product market threats; Stock crash risk; Tail risk; Bad news withholding

JEL Classification: G3, G12, G14, D4, L1