Corporate Derivatives Usage, Information Environment, and Stock Price Crash Risk

European Accounting Review, Forthcoming

62 Pages Posted: 26 Nov 2018 Last revised: 12 Apr 2021

See all articles by Jeong-Bon Kim

Jeong-Bon Kim

City University of Hong Kong

Yi Si

The School of Management, Xi'an Jiaotong University

Chongwu Xia

School of Management, University of Science and Technology of China

Lei Zhang

City University of Hong Kong (CityU)

Date Written: April 12, 2021

Abstract

This study investigates the effect of corporate derivatives usage on stock price crash risk. We test two competing hypotheses. Under the transparency hypothesis, derivatives usage reduces information opacity and lowers crash risk. Under the speculation hypothesis, derivatives usage exacerbates managerial short-termism and increases crash risk. We find evidence supporting the transparency hypothesis. This result is robust to sensitivity checks including a two-stage treatment model, difference-in-differences test, and subsample analysis. We further show that curbing bad news hoarding, curtailing overinvestment, and increasing breadth of ownership are potential channels through which derivatives usage mitigates crash risk. Additional tests on the effect of derivatives usage on likelihood of securities class-action litigation provide consistent results.

Keywords: Derivatives Usage; Stock Price Crash Risk; Information Opacity; Agency Theory

JEL Classification: G12, G14, G32

Suggested Citation

Kim, Jeong-Bon and Si, Yi and Xia, Chongwu and Zhang, Lei, Corporate Derivatives Usage, Information Environment, and Stock Price Crash Risk (April 12, 2021). European Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3262842 or http://dx.doi.org/10.2139/ssrn.3262842

Jeong-Bon Kim

City University of Hong Kong ( email )

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

Yi Si

The School of Management, Xi'an Jiaotong University ( email )

No.28 Xianning West Road
Xi'an, Shaanxi 710049
China

Chongwu Xia

School of Management, University of Science and Technology of China ( email )

Hefei, Anhui
China

Lei Zhang (Contact Author)

City University of Hong Kong (CityU) ( email )

College of Business
83 Tat Chee Avenue
Hong Kong
China

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