Industry Effects on Stock Price Crash Risk: Quantifying Industry Effects and the Effect of Structural Industry Characteristics

Abstract: This paper empirically investigates the determinants of stock price crash risk at the industry level. Prior research has largely focused on firm-level and macro-level factors that impact stock price crash risk, with little attention being drawn to inter-industry differences. Using a large sample of US firms from different industries, this paper finds significant industry fixed effects on stock price crash risk, with varying magnitudes between industries. For example, industries in the health care sector are consistently associated with high crash risk, while industries in the energy sector are consistently associated with low crash risk. Furthermore, this study examines possible underlying dynamics of these industry effects by analyzing the effects of three structural industry characteristics on crash risk. The findings indicate a significant positive effect of industry growth rate on stock price crash risk, as well as a significant negative effect of industry profitability during the period 1985-2000. No effects are found for industry concentration, although it is concluded that this may be due to limitations in the proxy used.