Firm Characteristics and Stock Returns during Market Crashes : Evidence from Swedish Equity Markets

Sammanfattning

Stock market crashes are periods of extreme market stress where stock prices decline sharply and the uncertainty among investors increases. Previous research such as Arshanapalli and Doukas (1993) and Pan et al. (2001) has focused more on aggregate market behavior during crashes and given less attention to differences in stock returns across firms during the same market-wide shock. This study examines whether leverage, liquidity and profitability explain cross-sectional variation in stock returns during market crashes in the Swedish equity market. The study applies an event-based cross-sectional research design. Market crashes are identified as trading days when our value-weighted Swedish market index declines by five percent or more. For each crash day, separate cross-sectional regressions are estimated using firm-level stock returns as the dependent variable. The main explanatory variables are leverage, liquidity and profitability. We also include several control variables, such as beta, firm size, market-to-book, illiquidity, cash flow per share, pre-crash volatility, lagged returns and industry indicators. The results suggest that firm characteristics can explain part of the differences in stock returns on crash days, although the evidence is not equally strong for all three variables. Profitability gives the clearest results, as firms with stronger operating performance seem to be less negatively affected during several of the crash events. Leverage and liquidity, on the other hand, show weaker patterns and appear to depend more on the specific event. The robustness tests, using both non-winsorized data and alternative definitions of the variables, support this overall interpretation. This study adds to financial literature by focusing on the relevance of firm-level characteristics on stock prices in the Swedish equity market. This is relevant since Sweden differs from the U.S. in areas such as financial structure and ownership patterns. Overall, the findings indicate that accounting information at the firm level can matter during market crashes, but that some firm characteristics seem to be more important than others.