Why does good news increase stock price crash risk: An explanation based on the gambling channel

Liu Yang and Eunmi Tatum Lee

Journal of Behavioral and Experimental Finance, 2025, vol. 47, issue C

Abstract: This study investigates the relationship between corporate performance and stock price crash risk, uncovering an intriguing phenomenon: higher corporate performance, including both ROA and ESG performance, significantly increases the risk of stock price crashes. However, this finding cannot be explained by existing theories on stock price crash risk, particularly the widely applied agency theory. To address this, the paper explores a key driver of this phenomenon, the gambling factor. After controlling for the gambling factor, the true effect of corporate performance in reducing stock price crash risk becomes apparent. Further channel tests confirm the robustness of the ROA performance result, showing that the impact of company financial performance in reducing stock price crash risk is more pronounced during periods of heightened market volatility and for stocks with higher investor search volumes. This study approaches the issue of stock price crash risk from an asset pricing perspective, and the results highlight that the gambling factor in the financial market should not be overlooked.

Keywords: Stock price crash risk; Good news disclosure; Stock price crash channels; ESG; Gambling (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:beexfi:v:47:y:2025:i:c:s221463502500070x

DOI: 10.1016/j.jbef.2025.101089

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