Purpose This study investigates the pricing of stock price crash risk in firms’ ex ante cost of equity capital. Design/methodology/approach A large sample of firms is constructed, and a multivariate regression model is specified to empirically examine the pricing of stock price crash risk. A battery of follow-up tests is performed to address endogeneity, conduct trichotomy analysis, explore roles of various moderators and check robustness. Findings This study finds that firms with higher levels of stock price crash risk tend to have more expensive equity financing, and the positive pricing is more pronounced for firms with lower ratings of corporate social responsibility, lower sustainable competitive advantage and during time periods of economic shocks respectively. Moreover, the trichotomy analysis indicates that a high stock price crash risk would cause a short-run valuation discount with respect to sector multiples and simultaneously diminish a firm’s long-run valuation relative to the book value. Practical implications Stock price crash risk is a meaningful and priced risk factor in capital markets. It captures deeper vulnerabilities within a firm and directly affects the ability to attract capital, sustain growth and maintain valuation, making it a critical factor in both corporate decision-making and investment evaluation. Originality/value This study serves as a leading study to formally examine the pricing of stock price crash risk in firms’ ex ante cost of equity capital. It also reveals the roles of corporate social responsibility, sustainable competitive advantage and economic shocks, which builds the bridge across various streams of literature.
Yu et al. (Tue,) studied this question.