- E-ISSN2233-5382
- KCI
E-ISSN : 2233-5382
The Effect of Control-Ownership Wedge on Stock Price Crash Risk
Ryu, Hae-Young
Abstract
Purpose - This study examines the effect of control-ownership wedge on stock crash risk. In Korea, controlling shareholders have exclusive control rights compared to their cash flow rights. With increasing disparity, controlling shareholders abuse their power and extract private benefits at the expense of the minority shareholders. Managers who are controlling shareholders of the companies tend not to disclose critical information that would prevent them from pursuing private interests. They accumulate negative information in the firm. When the accumulated bad news crosses a tipping point, it will be suddenly released to the market at once, resulting in an abrupt decline in stock prices. We predict that stock price crash likelihood due to information opaqueness increases as the wedge increases. Research design, data, and methodology - 831 KOSPI-listed firm-year observations are from KisValue database from 2005 to 2011. Control-ownership wedge is measured as the ratio (UCO -UCF)/UCO where UCF(UCO) is the ultimate cash-flow(control) rights of the largest controlling shareholder. Dependent variable CRASH is a dummy variable that equals one if the firm has at least 1 crash week during a year, and zero otherwise. Logistic regression is used to examine the relationship between control-ownership wedge and stock price crash risk. Results - Using a sample of KOSPI-listed firms in KisValue database for the period 2005-2011, we find that stock price crash risk increases as the disparity increases. Specifically, we find that the coefficient of WEDGE is significantly positive, supporting our prediction. The result implies that as controlling shareholders' ownership increases, controlling shareholders tend to withhold bad news. Conclusions - Our results show that agency problems arising from the divergence between control rights and cash flow rights increase the opaqueness of accounting information. Eventually, the accumulated bad news is released all at once, leading to stock price crashes. It could be seen that companies with high control-ownership wedge are likely to experience future stock price crashes. Our study is related to a broader literature that examined the effect of the control-ownership wedge on stock markets. Our findings suggest that the disparity is a meaningful predictor for future stock price crash risk. The results are expected to provide useful implications for firms, regulators, and investors.
- keywords
- Control-ownership Disparity, Wedge, Agency Problem, Sock Price Crash Risk
Reference
Chae, S. J., & Hwang, H. J. (2017). The effect of audit quality on crash risk: Focusing on distribution &service companies. Journal of Distribution Science, 15(8), 47-54.
Chen, J., Hong, H., & J. Stein. (2001). Forecasting crashes: Trading volume, past returns, and conditional skewness in stock prices. Journal of Financial Economics, 61, 345-381.
Claessens, S., Djankov. S., & Lang. L. H. P. (2000). The separation of ownership and control in east asian corporations. Journal of Financial Economics, 58, 81-112.
DeFond, M. L., Hung, M., Li, S., & Li, Y. (2015). Does mandatory IFRS adoption affect crash risk?. The Accounting Review, 90(1), 265-299.
Diamond. D. (1985). Optimal release of information by firms. Journal of Finance, 40, 1071-1094.
Fan, J., & Wong, T. J. (2002). Corporate ownership structure and the informativeness of accounting earnings in East Asia. Journal of Accounting and Economics, 33(3), 401-425.
Gwon, J. H. (2015). Formation of corporate governance in Korea: The rise of chaebols (1910-1980). East Asian Journal of Business Management, 5(4), 67-72.
Han, S. H., Kang, K., & Shin, Y. S. (2016). Bond ratings, corporate governance, and cost of debt: The case of Korea. The Journal of Asian Finance, Economics and Business, 3(3), 5-15.
Healy, P. M., & Palepu, K. G. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting & Economics, 31(September), 405-440.
Huang, W., Liu, Q., Rhee, G., & Wu, F. (2012). Extreme downside risk and expected stock returns. Journal of Banking and Finance, 36(5), 1492–1502.
Hutton, A. P., Marcus, A. J., & Tehranian, H. (2009). Opaque financial reports, R2 and crash risk. Journal of Financial Economics, 94, 67-86.
Ibragimov, R., & Walden, J. (2007). The limits of diversification when losses may be large. Journal of Banking and Finance, 31(8), 2551–2569.
Jin, L., & Myers, C. S. (2006). Around the world: New theory and new tests. Journal of Financial Economics, 79, 257-292.
Johnson, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2000). Tunneling. American Economic Review Papers and Proceedings, 90, 22-27.
Kim, J. B., Li, Y., & Zhang, L. (2011). Corporate tax avoidance and stock price crash risk: firm-level analysis. Journal of Financial Economics, 100, 639-662.
Kothari, S. P., Shu, S., & Wysocki, P. D. (2009). Do manager withhold bad news?. Journal of Accounting Research, 47, 241-276.
La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (1999). Corporate ownership around the world. Journal of Finance, 54, 471-518.
Morck, R., Yeung, B., & Yu, W. (2000). The information content of stock markets: Why do emerging markets have synchronous stock price movement?. Journal of Financial Economics, 58, 215-260.
Santa-Clara, P., & Yan, S. (2010). Crashes, volatility, and the equity premium: Lessons from S&P 500options. Review of Economics and Statistics, 92(2), 435–451.
Shleifer, A., & Vishny, R. (1997). A survey of corporate governance. Journal of Finance, 52(2), 737-783.
Sunder, S. (2010). Riding the accounting train: From crisis to crisis in eighty years. Presentation at the Conference on Financial Reporting, Auditing and Governance, April, 23, Lehigh University, Bethlehem, PA.
Verrecchia, R. (2001). Essays on disclosure. Journal of Accounting and Economics, 32, 97-180.
- Downloaded
- Viewed
- 0KCI Citations
- 0WOS Citations