Board diversity and stock price crash risk

We show how board diversity influences stock price crash risk. By classifying board diversity into relation-oriented diversity (gender and age) and task-oriented diversity (tenure and education), we find that greater diversity on board can lower the risk of future stock crash. Additional analyses show that the effect of board diversity on future crash risk is stronger for firms with high information opacity and low institutional ownership. Overall, our findings provide new insights and suggest for more diverse boards to improve corporate governance practices.     

Powerful CEOs and stock price crash risk

We find that powerful chief executive officers (CEOs) are associated with higher crash risk. The positive association between CEO power and crash risk holds when controlling for earnings management, tax avoidance, chief executive officer's option incentives, and CEO overconfidence. Firms with powerful CEOs have higher probability of financial restatements, lower proportion of negative to positive earnings guidance, and lower ratio of negative to positive words in their financial statements. The association between powerful CEOs and higher crash risk is mostly evident among firms with higher sensitivity of CEO wealth to stock prices and when CEOs have lower general skills. External monitoring mechanisms weaken but do not eliminate the association between powerful founder CEOs and higher crash risk.     

Internal whistleblowing and stock price crash risk

We investigate the impact of internal whistleblowing on stock price crash risk in China. We expect that internal whistleblowing plays a crucial role in preventing firms from misconducting, which would result in a lower stock price crash risk. Consistent with this conjecture, the empirical evidence negatively correlates internal whistleblowing and stock price crash risk. Our results remain robust when adopting the instrumental variable, propensity matching method, and Heckman's two-stage model. Path analysis shows that internal whistleblowing lowers the crash risk by reducing firms' accounting violations and executives' frauds. The effect is more pronounced in firms with a positive organizational environment and non-state-owned firms. Overall, the study contributes to the emerging literature on the governance role of whistleblowing.     

Internal coalition and stock price crash risk

We examine the impact of internal coalition, measured by the appointment of the top executives and directors by the CEO after he assumes office, on stock crash risk during 2000–2014. The appointment-based internal coalition has a positive and significant impact on stock crash risk. Internal coalition is a more important factor than measures of CEO power, such as CEO tenure and duality, in predicting stock price crash. We address the endogeneity concerns by utilizing an exogenous shock to the internal coalition to conduct difference-in-differences (DID) regressions. The main results survive numerous robustness tests.     

Institutional cross-ownership and stock price crash risk

Using manually collected data of Chinese listed firms during the period 2007–2018, we provide strong and robust evidence that institutional cross-ownership is negatively associated with firm-specific stock price crash risk. Building on China’s institutional settings, we document that the negative relation is more pronounced for firms located in provinces with higher political uncertainty, or state-owned enterprises. This paper also conducts several mechanisms analyses and has confirmed three potential influencing mechanisms, such as information advantage, governance improvement and anticompetitive incentives, in explaining the effect of institutional cross-ownership on stock price crash risk. Overall, this paper develops a new perspective to investigate the ways to alleviate stock price crash risk in emerging markets.     

Intangible intensity and stock price crash risk

We evaluate the association between intangible intensity and stock price crash risk for U.S. listed firms from 1983 to 2017. The results show that intangible-intensive firms are associated with high crash risk. The decomposition of intangible intensity identifies goodwill as the driving force and documents its predictability for future impairment events. Moreover, intangible intensity affects stock price crash risk mainly through increased information asymmetry, and the positive association increases with stock price synchronicity, CEO risk-taking incentives, and shareholder litigation risk. Our findings demonstrate the fragility of intangible assets and provide implications for financial regulation and portfolio management.     

Short interest and stock price crash risk

Using a large sample of U.S. public firms, we find robust evidence that short interest is positively related to one-year ahead stock price crash risk. The evidence is consistent with the view that short sellers are able to detect bad news hoarding by managers. Additional findings show that the positive relation between short interest and future crash risk is more salient for firms with weak governance mechanisms, excessive risk-taking behavior, and high information asymmetry between managers and shareholders. Empirical support is provided showing that the relation between short interest and crash risk is driven by bad news hoarding.     

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.     

Board social capital and stock price crash risk

Review of Quantitative Finance and Accounting - We show how board social capital influences stock price crash risk. Considering that directors are embedded in two kinds of social...     

Economic policy uncertainty and stock price crash risk

We examine the impact of economic policy uncertainty (EPU) on firm-specific crash risk. Based on a large sample of Chinese listed firms over the period from 2000 to 2017, we provide empirical evidence that firms are more likely to experience stock price crashes when EPU increases. Cross-sectionally analysis further reveals that the impact of EPU on stock price crash risk is stronger for firms whose returns are more sensitive to EPU. More specifically, young stocks, small stocks, high volatility stocks, and growth stocks, which have higher valuation uncertainty per se, are more sensitive to EPU and are more affected by EPU in terms of crash risk. We further show that EPU is significantly and positively associated with aggregated stock price crash risk at the market level.     

Local speculative culture and stock price crash risk

Using unique city gambling conviction data in China as a proxy for a local speculative culture, we examine the impact of such a culture on stock price crash risk. We find that firms in regions with a stronger speculative culture are more likely to experience future stock price crash risk. The results are consistent after using 2SLS regression analysis (IV) and staggered difference-in-difference (DID) analysis to mitigate endogeneity concerns. Further analysis shows that overinvestment, excessive debt, accounting conservatism and charitable donations are the main channels through which local speculative culture affects stock price crash risk. We also find that the positive relationship between local speculative culture and stock price crash risk is more salient for small firms and firms with managers with a cultural backgrounds similar to the local culture. Our study implies that the local culture plays an important role in the practice of corporate governance.     

Shareholder litigation rights and stock price crash risk

We study the impact of shareholder-initiated litigation risk on a firm's stock price crash risk. Our empirical analysis takes advantage of the staggered adoption of universal demand laws, which led to an exogenous decline in derivative litigation risk. We find that a decline in the threat of derivative litigation reduces crash risk and that information hoarding associated with earnings management is a channel through which litigation risk affects crash risk. The relationship is also moderated by how exposed firms are to the other primary form of shareholder litigation, namely securities class-action lawsuits.     

CEO facial structure and stock price crash risk

This study conducted an empirical analysis of a manually collected sample of chief executive officer (CEO) facial structure measurements (facial width-to-height ratio [FWHR]) to examine the relationship between FWHR and stock price crash risk. The samples were collected for the period 2008–2019 from Chinese A-share listed firms. The results revealed a positive impact of FWHR on stock price crash risk. The positive impact is more pronounced for firms in which CEOs are entrusted with greater powers, firms that appoint a higher number of independent directors, or which function in a more competitive product market. Various robustness and endogeneity tests confirm our main conclusions.     

Major government customers and stock price crash risk

This paper studies whether government’s participation in product market, as a customer, affects supplier firms’ stock price crash risk. Using a sample of U.S. firms from 1980 to 2015, we find robust evidence that the presence of major government customers is associated with a lower level of stock price crash risk for supplier firms. Further, we show that government customers can lower suppliers’ crash risk by imposing monitoring activities on suppliers and/or reducing suppliers’ operational risk, leading to a reduction in supplier managers’ bad news hoarding behavior. Overall, our results indicate that government spending, as an important public policy, can significantly affect shareholders’ value by mitigating stock price crash risk.     

News-based ESG sentiment and stock price crash risk

From the perspective of ESG news-based sentiment, we examine the impact of ESG performance on stock price crash risk. This paper constructs a sentiment index based on ESG news to measure public opinion of listed firms. First, there is a significant negative relationship between ESG news sentiment and stock price crash risk, indicating that higher ESG news sentiment can reduce the crash risk. Second, heterogeneity analysis demonstrates that ESG sentiment has a greater impact on crash risk reduction for firms with lower analyst coverage, lower information transparency, voluntary ESG information disclosure and non-state-owned. In addition, mechanism tests indicate that ESG sentiment affects stock price crash risk by reducing negative ESG incidents, information asymmetry, and agency costs. This paper examines the research inference that ESG news sentiment is beneficial in reducing stock price crash risk and expands the research on the governance mechanism of stock price crash risk.     

Auditor-provided tax services and stock price crash risk

This paper examines whether auditor-provided tax services affect stock price crash risk: an important consideration for stock investors. Provision of tax services by incumbent auditors could accentuate or attenuate crash risk depending on whether such services give rise to knowledge spillover or impair auditor independence. The study investigates two channels through which tax services might affect crash risk: earnings management in tax expenses and tax avoidance. Also examined is whether the association between tax services and crash risk is moderated by the particular business strategy that organizations pursue. A two-stage model is used to control for the potential endogeneity inherent in the selection of auditors for tax services. Empirical findings reveal that auditor-provided tax services attenuate crash risk by constraining both earnings management in tax expenses and tax avoidance. Further evidence shows that auditor-provided tax services reduce crash risk for firms following innovator business strategies. Taken together, empirical findings reported in this study support knowledge spillover benefits, that is, insights gained from tax services can enhance audit effectiveness.     

Economic policy uncertainty and stock price crash risk

This paper studies the impact of economic policy uncertainty on stock price crash risk using data from China. We develop a new index to measure Chinese economic policy uncertainty and find that economic policy uncertainty has a remarkable positive effect on stock price crash risk. However, the effect reverses later. The results also indicate that the positive effect of economic policy uncertainty on stock price crash risk is more prominent for state‐owned enterprises. Moreover, this effect is more prominent for firms with higher information asymmetry and firms with greater disagreement among investors, indicating that economic policy uncertainty affects crash risk through two mechanisms: managers’ concealment of bad news and investors’ heterogeneous beliefs.     

Chief financial officer overconfidence and stock price crash risk

Numerous studies have shown the prevalence of overconfidence among Chief Financial Officers (CFOs). Surprisingly, the real effect of CFO overconfidence is under-researched. Using data from a large sample of US-listed firms over the period 1993–2019 and adopting an eclectic theoretical approach, we find that overconfident CFOs are more likely to increase stock price crash risk than non-overconfident CFOs through risk-taking and bad news hoarding. These findings pass a series of robustness tests. Furthermore, departing from most overconfident studies that merely examine one type of top managers (i.e., Chief Executive Officer (CEO)), we consider the influence of CEO and CFO overconfidence jointly. Interestingly, we find that CFO overconfidence outweighs CEO overconfidence in influencing stock price crash risk. Moreover, the overconfidence effect is intensified when overconfident CFOs collaborate with overconfident CEOs, thus raising stock price crash risk. However, stronger governance and a transparent information environment constrain overconfident CFOs' effect on stock price crash risk. Overall, our findings highlight the importance of CFO overconfidence in determining stock return tail risks.     

Operating cash flow opacity and stock price crash risk

We examine the relation between operating cash flow (OCF) opacity and stock price crash risk. We find that OCF opacity is positively associated with future stock price crash risk after controlling for accruals opacity and other determinants known to influence crash risk. This finding suggests that OCF opacity facilitates bad news hoarding and enables managerial resource diversion, which in turn increases crash risk. We also find that the positive relation between OCF opacity and crash risk is more pronounced when external monitoring is weak, information asymmetry is high, OCF importance is low, and cost of accruals management is high. Overall, our evidence highlights the severe consequence of OCF opacity in that it boosts crash risk; our study should alert the researchers, investors, and regulators to pay more attention to OCF management.