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
Date Written: April 12, 2021
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: Suggested Citation