Unequal Grounds and Unstable Markets: Income Inequality and Stock Price Crash Risk

This study analyzes the relationship between country-level income inequality and stock price crash risk using a comprehensive cross-country panel of 117,017 firm-year observations from 45 countries spanning 2000–2022. We document that firms headquartered in countries with higher income inequality face a significantly greater likelihood of experiencing stock price crashes. Building on behavioral finance theory, we argue that income inequality exacerbates managerial incentives to withhold negative information, thereby increasing crash risk. We further show that this relationship is moderated by both country-level and firm-level mechanisms that influence information transparency. Specifically, stronger national transparency, greater institutional ownership, and lower excess cash weaken the positive association between income inequality and crash risk. Our results remain robust across alternative crash risk measures and endogeneity tests, including instrumental variable and propensity score matching approaches. These findings highlight income inequality as an important macro-level determinant of financial market instability and underscore the role of transparency and monitoring in mitigating its adverse effects on capital markets.