Bank Financial Distress and Stock Price Crashes: A Quasi‐Experimental Approach

ABSTRACT Using 118,292 US bank‐month observations, we examine the effects of short‐term changes in bank's financial distress on stock price crash risk. There is a significant positive association between short‐term changes in distress on stock price crash risk. The results remain consistent across alternative measures of distress and crash risk. We confirm robustness by employing additional tests for reverse causality and propensity score matching. We find opacity, proxied by discretionary loan‐loss provisions to be a potential channel through which increase in distress affects future crash risk. Our study underscores the critical association between increasing financial distress, loan‐loss reporting, and crash risk.