Open AccessSlack And Crash Risk
Author(s) -
Theodore H. Goodman,
Volkan Muslu,
Hyungshin Park
Publication year - 2020
Publication title -
journal of applied business research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.149
H-Index - 22
eISSN - 2157-8834
pISSN - 0892-7626
DOI - 10.19030/jabr.v36i3.10347
Subject(s) - hoarding (animal behavior) , crash , business , stock (firearms) , profit (economics) , supply chain , actuarial science , economics , microeconomics , marketing , engineering , computer science , mechanical engineering , ecology , foraging , biology , programming language
We examine how a firm’s operational slack is associated with current income and future stock price crash risk. By doing so, we test the validity of a firm’s alternative motivations for holding operational slack. We show that Supply Chain Slack, which is based on excess working capital, is associated with higher current profits and higher future crash risk. This evidence is consistent with the firm hoarding bad news. In contrast, SG&A Slack, which is based on excess selling, general, and administrative expenses, is associated with lower current income and lower future crash risk. This evidence is consistent with the firm insuring against rare and adverse events. Furthermore, a firm’s stock price crash risk is lower when a slack type is more costly, consistent with both motivations. Overall, our findings suggest a stronger profit-crash risk tradeoff when firms hold more operational slack.