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This study investigates the effect of corporate derivatives usage on stock price crash risk. We test two competing hypotheses. Under the  transparency hypothesis , derivatives usage reduces information opacity and lowers crash risk. Under the  speculation hypothesis , derivatives usage exacerbates managerial short-termism and increases crash risk. We find evidence supporting the  transparency hypothesis.  This result is robust to sensitivity checks including a two-stage treatment model, difference-in-differences test, and subsample analysis. We further show that curbing bad news hoarding, curtailing overinvestment, and increasing breadth of ownership are potential channels through which derivatives usage mitigates crash risk. Additional tests on the effect of derivatives usage on likelihood of securities class-action litigation provide consistent results.

Corporate Derivatives Usage, Information Environment, and Stock Price Crash Risk