Financial distress and stock price crash risk in Egyptian firms

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Economic policy uncertainty intensified as a result of the global financial crisis. To overcome these obstacles, firms handle issues with financial distress and crash risk more proactively. This paper offers new insights into the relationship between financial distress and crash risk on the Egyptian stock market during the period of 2014–2021 and presents how managers strengthen the bad news hoarding mechanism to their advantage. Data were collected via financial statements and reports obtained from the Thomson Reuters database using 824 annual observations of 103 Egyptian firms via the generalized method of moments and ordinary least squares. Results show a strong positive impact of financial distress on crash risk using OLS and GMM. Results support the role of managerial opportunism to cover up bad news that undermines a firm’s economic fundamentals. The findings support an agency theory of how financial distress affects crash risk. The findings support conducting robust tests for alternative financial distress and crash risk measures.

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    • Table 1. Distribution of the relevant sectors
    • Table 2. Measurements of variables
    • Table 3. Descriptive statistics
    • Table 4. Correlation table
    • Table 5. Diagnostics tests
    • Table 6. The effect of financial distress on the crash risk
    • Table 7. Robustness test
    • Conceptualization
      Asmaa Samir, Medhat AbdElRasheed Nofal, Manal Khalil
    • Data curation
      Asmaa Samir
    • Investigation
      Asmaa Samir, Ahmed Rashed
    • Methodology
      Asmaa Samir, Medhat AbdElRasheed Nofal, Ahmed Rashed, Manal Khalil
    • Project administration
      Asmaa Samir, Medhat AbdElRasheed Nofal, Manal Khalil
    • Resources
      Asmaa Samir, Medhat AbdElRasheed Nofal, Manal Khalil
    • Software
      Asmaa Samir, Medhat AbdElRasheed Nofal, Ahmed Rashed, Manal Khalil
    • Supervision
      Asmaa Samir, Medhat AbdElRasheed Nofal, Ahmed Rashed, Manal Khalil
    • Writing – original draft
      Asmaa Samir, Ahmed Rashed
    • Writing – review & editing
      Asmaa Samir, Ahmed Rashed
    • Validation
      Medhat AbdElRasheed Nofal
    • Visualization
      Medhat AbdElRasheed Nofal
    • Formal Analysis
      Ahmed Rashed
    • Funding acquisition
      Ahmed Rashed