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Legal Liability and Stock Price Crash Risk: Evidence From a Quasi‐Natural Experiment

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  • Hung Cao
  • Hieu V. Phan
  • Matteo P. Arena

Abstract

We investigate the impact of a 2001 Nevada corporate law reform, which reduced the legal liability of corporate directors and officers, on stock price stability. Our analysis addresses previous conflicting evidence and reveals a significant decrease in stock price crash risk following this legal change, particularly among small, young, and weakly governed firms. We attribute this reduction primarily to diminished earnings management practices and improved quality of corporate information disclosures. Our findings underscore the influence of reduced managerial legal liability on shaping the corporate information landscape and mitigating stock price crash risk.

Suggested Citation

  • Hung Cao & Hieu V. Phan & Matteo P. Arena, 2026. "Legal Liability and Stock Price Crash Risk: Evidence From a Quasi‐Natural Experiment," The Financial Review, Eastern Finance Association, vol. 61(3), pages 765-785, August.
    • Handle: RePEc:bla:finrev:v:61:y:2026:i:3:p:765-785
    DOI: 10.1111/fire.70040
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    References listed on IDEAS

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