Stock Liquidity,Overinvestment And Stock Price Crash Risk

The "sudden rise" and "slump" of the stock market are very specially phenomenon in the capital market.The stock price crash risk brought by the "plunge" of stock prices will cause damages to the capital market,the investors' wealth,and the real economy,which stakeholders should pay much attention to.This paper examines the impact of overinvestments on stock price crash risk using a large sample of Chinese listed firms of the 2007-2016 period.We find that firms that have over-investment behavior are more likely to suffer a stock price crash in the future.This is because of the existence of agency costs.Managers are self-interested,they will choose the projects that are good for his own profits but bad for the company.Over-invested projects invade cash flow,leading to a loss of corporate value.In the meantime,managers continue to hide information from shareholders,leading to accumulation of risks and a stock price crash.We further examine the role of stock liquidity in influencing the relationship between the crash risk and overinvestment.We notice that the higher the stock liquidity is,the more it will be able to curb the impact of excessive investment on the company' s stock price crash risk.In a high-liquidity-market,transactions are frequently conducted so the information hide in stock price will be more accurate.Managers will find it difficult to concealing "bad"information from shareholders and investors,therefore reduce the crash risk.The result is robust to alternative variables and models.The contributions of this paper are:?we provide support for the relationship between over-investment and stock price crash risk,which enriches the factors that may affect the stock price crash risk;?we provide new regulatory ideas for regulators;?we provide investors with new identification perspectives on risks.We suggest shareholders to carry out corporate supervision and self-examination while noticing the sign of over-investment.In addition,the regulatory agencies should make efforts to eliminate unfavorable factors which impede the liquidity,and build a healthy,high efficiency market.