Stock Liquidity and Price Crash Risk: Evidence from a Kernel Matching Approach

We present firm-level evidence that a company's stock liquidity entails a hidden cost and thus heightens its future crash risk. We employ a difference-in-differences (DID) propensity score matching method in a non-experimental setting to substantiate this causal effect of liquidity on crash risk. Following the recent literature that attributes this risk to the sudden release of bad information, we subsequently identify the negative impact of liquidity on the revelation of firm-level information as a potential viable channel through which liquidity increases the likelihood of stock price crashes. This paper provides a thorough analysis of this causal effect using a nonparametric method.