When stock price crash risk meets fundamentals

We investigate the relationship between fundamental strength and stock price crash risk by analyzing a large sample of Chinese firms. We mainly find that firms with stronger (weaker) total fundamental strength, higher (lower) profitability and higher (lower) operating efficiency have lower (higher) stock price crash risk. Moreover, this negative relationship is more pronounced for firms with a great number of short-term institutional investors and opaque firms. Additional test illustrates that internal control could ameliorate this negative relationship. All these findings are robust to alternative measurements of crash risk and endogeneity correction.