Corporate Governance and Firm-Specific Stock Price Crashes

Forthcoming to European Financial Management, 2016

62 Pages Posted: 28 Mar 2012 Last revised: 2 Apr 2016

Panayiotis C. Andreou

Cyprus University of Technology

Constantinos Antoniou

University of Warwick - Warwick Business School

Joanne Horton

University of Exeter Business School

Christodoulos Louca

Cyprus University of Technology

Multiple version iconThere are 2 versions of this paper

Date Written: June 30, 2015

Abstract

We investigate whether four dimensions of corporate governance mechanisms, namely ownership structure, accounting opacity, board structure and process and managerial incentives, relate to 1-year-ahead stock price crash risk. Employing principal component analysis on the 21 attributes that comprise these four categories, we find that corporate governance explains overall between 13.1% and 23.0% of a one standard deviation in future crash risk. Further analysis reveals that transient institutional ownership, CEO stock option incentives and the percentage of directors that hold equity in the firm increase a firm’s future stock price crash, whilst insiders’ ownership, conditional accounting conservatism, board size and the presence of a corporate governance policy have the ability to mitigate crashes. The relations between these governance attributes and future crash risk are more pronounced in environments that accentuate agency risk. Our findings support the notion that sound corporate governance systems curb opportunistic behavior of managers to hide and accumulate bad news from outsiders.

Keywords: Crash Risk, Corporate Governance

JEL Classification: G30

Suggested Citation

Andreou, Panayiotis C. and Antoniou, Constantinos and Horton, Joanne and Louca, Christodoulos, Corporate Governance and Firm-Specific Stock Price Crashes (June 30, 2015). Forthcoming to European Financial Management, 2016. Available at SSRN: https://ssrn.com/abstract=2029719 or http://dx.doi.org/10.2139/ssrn.2029719

Panayiotis C. Andreou

Cyprus University of Technology ( email )

School Of Management and Economics
P.O. Box 50329
Lemesos, 3036
Cyprus

HOME PAGE: http://www.pandreou.com

Constantinos Antoniou

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Joanne Horton

University of Exeter Business School ( email )

Streatham Court
Xfi Building, Rennes Dr.
Exeter, EX4 4JH
United Kingdom

Christodoulos Louca (Contact Author)

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

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