A critique of the agency theory viewpoint of stock price crash risk: The opacity and overinvestment channels

British Journal of Management

58 Pages Posted: 1 Mar 2021 Last revised: 21 Nov 2022

See all articles by Panayiotis C. Andreou

Panayiotis C. Andreou

Cyprus University of Technology

Neophytos Lambertides

Cyprus University of Technology

Marina Magidou

University of Central Lancashire - Cyprus; Cyprus University of Technology

Date Written: January 27, 2021

Abstract

This study documents a puzzling historical trend in crash risk for US-listed firms: between 1950 and 2019, the firm-year occurrences of idiosyncratic stock price crashes rose from 5.5% to an astonishing 27%. The vastness of the literature notoriously attributes crashes to agency reasons, i.e., self-interested executives who strategically camouflage bad news via the financial reporting opacity and overinvestment channels. Nonetheless, we document that the opacity- and overinvestment-crash relations are nonsignificant, especially in the period following the enforcement of the Sarbanes–Oxley Act. The statistically nonsignificant relations are also witnessed in tests that account for the effect of equity-based compensation incentives and corporate governance functions. Overall, this study criticizes the efficacy of opacity and overinvestment as channels in explaining crash risk. Our conclusions offer avenues for future research to pursue in rationalizing the puzzling surge in stock price crashes.

Keywords: stock price crashes, crash risk, bad news hoarding, agency theory, opacity, overinvestment, corporate governance

JEL Classification: G12, G30, G32

Suggested Citation

Andreou, Panayiotis C. and Lambertides, Neophytos and Magidou, Marina, A critique of the agency theory viewpoint of stock price crash risk: The opacity and overinvestment channels (January 27, 2021). British Journal of Management, Available at SSRN: https://ssrn.com/abstract=3774424 or http://dx.doi.org/10.2139/ssrn.3774424

Panayiotis C. Andreou (Contact Author)

Cyprus University of Technology ( email )

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

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

Neophytos Lambertides

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

Marina Magidou

University of Central Lancashire - Cyprus ( email )

Pyla, Larnaca
Cyprus

HOME PAGE: http://https://www.uclancyprus.ac.cy/academic/marina-magidou/

Cyprus University of Technology ( email )

Spyrou Araouzou
Limassol, 3036
Cyprus

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