Divergence of Cash Flow and Voting Rights, Opacity, and Stock Price Crash Risk: International Evidence

Posted: 12 Mar 2018

See all articles by Hyun A. Hong

Hyun A. Hong

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management

Jeong-Bon Kim

City University of Hong Kong

Michael Welker

Queen's University - Queen's School of Business

Date Written: December 1, 2017

Abstract

This study investigates whether and how the deviation of cash flow rights (ownership) from voting rights (control), or simply the ownership-control wedge, influences the likelihood that extreme negative outliers occur in stock return distributions, which we refer to as stock price crash risk. We do so using a comprehensive panel data set of firms with a dual-class share structure from 20 countries around the world for the period of 1995–2007. We predict and find that opaque firms with a large wedge are more crash prone than opaque firms with a small wedge. In addition, we predict and find that the positive relation between the wedge and crash risk is less pronounced for firms with more effective external monitoring and for firms with greater growth opportunities. The results of this study are broadly consistent with Jin and Myers’s theory that agency costs, combined with opacity, exacerbate stock price crash risk.

Keywords: ownership-control wedge; stock price crash risk; information opacity; IFRS

JEL Classification: G12; K22; M41

Suggested Citation

Hong, Hyun A. and Kim, Jeong-Bon and Welker, Michael, Divergence of Cash Flow and Voting Rights, Opacity, and Stock Price Crash Risk: International Evidence (December 1, 2017). Journal of Accounting Research, Vol. 55, No. 5, 2017, Available at SSRN: https://ssrn.com/abstract=3136034

Hyun A. Hong

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States

Jeong-Bon Kim

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Michael Welker (Contact Author)

Queen's University - Queen's School of Business ( email )

Kingston
Ontario, Ontario K7L 3N6
Canada

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