Could the simultaneous persistence of greater cash holdings and interest‐bearing debts affect stock price crash risk?

Abstract

We study the impact of a unique financial anomaly—the simultaneous persistence of greater cash holdings and interest‐bearing debts (SP‐GCHID) on stock price. Due to institutional diversity and the nature of transition economies, high cash holdings do not always stem from precautionary motive as usually claimed but can be the result of cash misappropriation and debt manipulation by major shareholders. Analysing data from Chinese listed firms from 2010 to 2018, we find that SP‐GCHID is associated with a higher stock price crash risk (SPCR). It is more evident among firms with major shareholders pledging their shares and firms exposed to more external information monitoring. SP‐GCHID also affects SPCR through increasing real earnings management, further suggesting that major shareholders' misappropriation is the main reason for SP‐GCHID's adverse effect. These findings are also robust in a range of endogenous tests. To our knowledge, this study is the first to explore the economic consequences of SP‐GCHID.