No abstract

This paper explores the puzzling trend observed in US-listed firms between 1950 and 2018; specifically, firm-specific stock price crashes rose from 6.5 percent to an astonishing 27 percent. The burgeoning literature attributes stock price crashes to agency-related problems resulting from managerial opportunism that seeks to camouflage bad news through the channels of financial reporting opacity and overinvestment. Our study offers empirical evidence suggesting that these agency-based channels play a limited role in explaining this increasing frequency of stock price crashes. We show, especially in the post-SOX period, that a statistical relationship between the two prominent channels and future stock price crashes is notably absent. This study contributes to the literature by bringing to the fore the stock price crash risk puzzle, for which a prominent explanation in the post-SOX era remains largely undetermined. Further, the study discusses possible explanations wherein future research can look for answers.

Portfolio allocation strategies, and notably the mean-variance approach, use past returns to assign optimal weights. Even though both past and expected returns should come from the same distribution, a formal test of whether this holds in practice has not been conducted yet. Thus, the study examines if the daily returns of 242 companies with continuous trading in the S&P index come from the same distribution using the Kolmogorov-Smirnov, Cramér-Von Mises, and Wilcoxon rank-sum tests. The tests suggest that generally stock returns do come from the same distribution. However, the hypothesis is rejected during the Great Recession, with the rejection rate increasing as the forecast horizon increased. The rejection rate, using an array of macroeconomic variables, is found to record high levels of persistence. Although macroeconomic variables were not found to be statistically significant determinants of the rejection rate, market distress has a small but significant effect.