Power Distance, Political Uncertainty and Stock Price Crash Risk: International Evidence
Posted: 1 Jul 2019
Date Written: September 1, 2016
This paper tests the proposition that the unbalanced power distance (i.e., Hofstede Cultural Dimensions- Power Distance Index) and individual stock price crash risk. We examine the stock price behavior of 35 countries’ listed firms from 2004 to 2016 and use multivariate analyses to document that societal power distance is important in explaining the propensity of releasing accounting information. These propensities create a psychological hint on timing management, particularly for bad news. As countries with higher Power Distance (PD) prefer to keep things under control, the result will be fewer unexpected stock price crashes during the long windows. However, because the higher Power Distance countries devote the market to maintain temporary peace before and during the periods of political events (i.e., national elections), the results will be changed to an increase in crash risks after the political events window. Consistent with these predictions, we find that, in the higher PD countries, companies have less incentive to hide negative information and to generate stock price crashes. This situation is substantially changed during the post-political windows when the firms and the ways of spreading information are more controlled by the government. Our findings suggest that formal mechanism alone is insufficient to explain the behaviors of corporate disclosure that entangle with informal instruments.
Keywords: culture, power distance, political uncertainty, crash risk
JEL Classification: G12, G14, G15
Suggested Citation: Suggested Citation