From Resilience to Inflexibility: The Share Price Effect of Operational Efficiency

37 Pages Posted: 23 Mar 2023

See all articles by Hamed Yousefi

Hamed Yousefi

Drew University

Kenneth Yung

Old Dominion University - Finance

Mohammad Najand

Old Dominion University - Finance

Abstract

This study examines the relationship between operational efficiency (OE) and stock price crash risk (SPCR). While high OE is arguably associated with better firm performance, it also increases vulnerability to disruptions and exposure to SPCR. Using a sample of US firms from 1997 to 2018, the study finds a positive relationship between OE and SPCR; additional results suggest that firm cash flow volatility serves as the channel through which this relationship is mediated. The study also finds evidence that high-OE firms tend to suppress bad news from investors, which exposes them to SPCR. Furthermore, the study shows that the positive relationship between OE and SPCR hurts firm value, highlighting the importance of balancing efficiency improvement efforts with business risk management. The results of this study have implications for managers and owners seeking to mitigate tail risk in firm investment decisions, and underscore the importance of maintaining business flexibility and resilience in the pursuit of efficiency.

Keywords: operational efficiency, Operational flexibility, Stock price crash risk, Bad new hoarding, Tail risk

Suggested Citation

Yousefi, Hamed and Yung, Kenneth and Najand, Mohammad, From Resilience to Inflexibility: The Share Price Effect of Operational Efficiency. Available at SSRN: https://ssrn.com/abstract=4398189 or http://dx.doi.org/10.2139/ssrn.4398189

Hamed Yousefi (Contact Author)

Drew University ( email )

36 Madison Avenue
Madison, NJ 07940
United States

Kenneth Yung

Old Dominion University - Finance ( email )

School of Business and Public Administration
Norfolk, VA 23529-0222
United States
757-683-3573 (Phone)

Mohammad Najand

Old Dominion University - Finance ( email )

School of Business and Public Administration
Norfolk, VA 23529-0222
United States
757-683-3509 (Phone)
757-683-5639 (Fax)

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