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“The moderating role of legal enforcement in ESG’s impact on corporate crash risk: Evidence from Asian stock market”
... Geopolitical risks also elevate the risk of crashes, as they are associated with higher market volatility and investors' anxiety (Fiorillo et al. 2024). Regulatory changes impacting corporate financial activities, such as changes in tax laws or labor laws, can also influence the risk of crashes by impacting corporate stability and investor perceptions (Tang 2023;Wattanatorn and Jantarakolica 2025). Additionally, systemic market skewness together with the liquidity of stocks also helps substantially in forecasting future crash risk (Cheuathonghua et al. 2022;Wattanatorn and Padungsaksawasdi 2022b). ...
... The demographic change associated with an aging population affects the dynamics of financial markets, one channel being through altered investment behavior and market liquidity. As people grow older, their investment preference changes from risky assets like stocks to less risky ones such as bonds (Wattanatorn and Jantarakolica 2025). This causes a decrease in demand for stocks and a reduction in market liquidity, further increasing volatility (Aisa et al. 2023;Dedry et al. 2017). ...
This study investigates the association between environmental, social, and governance (ESG) performance, demographic change, and stock price crash risk in major Asian markets over the period of 2011–2022. The results show that firms with high overall ESG scores are associated with lower stock price crash risk, underlining the importance of strong ESG practices in enhancing transparency and reducing information asymmetry. An increase in aging population is positively associated with crash risk, indicating demographic challenges to stock market stability. Furthermore, strong social practices are particularly effective at mitigating crash risk in aging societies. These findings highlight the importance of comprehensive ESG strategies by firms and the consideration of demographic trends in risk management practices by policymakers to maintain long-term financial stability. Two-stage least squares and propensity score matching approaches confirm that our results are not subject to endogeneity.
... SPSR is one of the risks that financial markets can't be overlooked. Stock price crash risk can be defined as unexpected and substantial fall in stock prices, resulting from information asymmetry between companies and investors due to unexpected release of negative information (Wattanatorn and Jantarakolica, 2025). ...
Numerous studies have shown the prevalence of overconfidence among Chief Financial Officers (CFOs). Surprisingly, the real effect of CFO overconfidence is under-researched. Using data from a large sample of US-listed firms over the period 1993-2019 and adopting an eclectic theoretical approach, we find that overconfident CFOs are more likely to increase stock price crash risk than non-overconfident CFOs through risk-taking and bad news hoarding. These findings pass a series of robustness tests. Furthermore, departing from most overconfident studies that merely examine one type of top managers (i.e., Chief Executive Officer (CEO)), we consider the influence of CEO and CFO overconfidence jointly. Interestingly, we find that CFO overconfidence outweighs CEO overconfidence in influencing stock price crash risk. Moreover, the overconfidence effect is intensified when overconfident CFOs collaborate with overconfident CEOs, thus raising stock price crash risk. However, stronger governance and a transparent information environment constrain overconfident CFOs' effect on stock price crash risk. Overall, our findings highlight the importance of CFO overconfidence in determining stock return tail risks.
This study explores the relationship between the debt maturity structure and the stock price crash risk for nonfinancial firms on the Borsa Istanbul from 2009 to 2019. Family ownership is added to the analyses to provide a new perspective on the literature examining the link between stock price crash risk and debt structure. The results show that an increase in long-term debt reduces the risk of a stock price crash, as efficient corporate management practices not only result in favorable debt issuance at a longer term but also reduces information asymmetry that leads to crash risk at firms. Furthermore, the mitigating effect of long-term debt on crash risk is more pronounced at family-controlled firms because active monitoring by family members causes lower agency conflicts in obtaining longer-term debt as well as in maintaining family status, which in turn also diminishes future stock price crashes.
This study examines whether ESG (environmental, social and governance) disclosure influences firm-specific crash risk. Our main research hypothesis postulates that further information disclosure about ESG activities and risks mitigates crash risk by virtue of lower opacity and information asymmetry between managers and outside investors (e.g., by facilitating the assessment of environmental and social risks and concerns faced by the firm). The analysis covers a global sample of firms and the period spanning 2007–2019. Overall, our findings confirm that ESG disclosure attenuates (future) firm-specific crash risk. The results are robust to different model specifications employed by previous research. The impact of ESG disclosure on crash risk is concentrated on firms from developed countries; benefits from ESG disclosure appear to be more limited in firms located in emerging markets and developing economies (EMDEs). Finally, the results from the decomposition of the ESG disclosure indicator suggest that all three dimensions (environmental, social and governance disclosure) weigh crash risk downwards.
This paper investigates the impact of banks’ social activities on their future stock price crash risk in an international setting. We propose two competing perspectives for the relationship. Signaling theory suggests that a high level of social engagement may signal high ethical standards of bank managers that tend to maintain financial transparency and are less likely to engage in bad news hoarding activities (i.e., concealing bad news from investors). Therefore, increased social activities are expected to be associated with reduced stock price crash risk. From the agency-cost perspective, social activities could be used as a tool by bank managers to divert shareholders’ attention and reduce the likelihood of stakeholders blowing the whistle on managerial misbehavior, which may increase managerial bad news hoarding and banks’ stock price crash risk. Using a comprehensive sample of 3,528 bank-year observations in 41 countries from 2003 to 2017, we find a positive relationship between banks’ social engagement and future stock price crash risk. This positive relationship is attenuated for banks with greater external monitoring and banks located in countries with stronger legal protection of investors and greater official supervisory power over the banking industry. We also show that banks’ social engagement is positively associated with the release of unexpected very bad news and managerial opportunistic behaviors in the future, supporting the agency-cost perspective of banks’ social activities. Overall, our findings reveal a negative side of banks’ social activities, suggesting that engaging in social activities may facilitate bank managers’ bad news hoarding behavior and increase future stock price crash risk in the banking industry.
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Using a sample of Chinese listed firms in the period from 2003 to 2012, this paper empirically investigates how the presence of politically connected directors affects stock price crash risk. We thereby make a distinction between listed state-controlled firms and privately controlled firms due to their different incentives to appoint politicians as directors on the board. Our empirical results show that politically connected directors exacerbate stock price crash risk in listed state-controlled firms, an effect driven by the appointment of local government officials as directors. In contrast, hiring politicians as directors, particularly central-government-affiliated directors, helps listed privately controlled firms to reduce stock price crash risk. Finally, good quality of institutions does not help to alleviate the positive relationship between political connections and stock price crash risk in listed state-controlled firms. However, it does weaken the role of political connections in reducing crash risk in listed privately controlled firms.
We investigate the effect of corporate green activity on the stock price crash risk. Using 2,222 US companies from 2002 to 2021, we find solid evidence that green activity is significantly related to lower firms’ price crash risk. Economically, a firm's price crash risk is reduced by 31.8% - 42.9% for participating in green activities. Moreover, the empirical results show that this negative effect is more substantial during high-climate risk periods. Our findings remain unchanged after controlling for endogeneity issues and several robustness tests.
Heterogeneous characteristics of executive teams have drawn wide concern as a factor highly related to economic decisions. Using data from 2015 to 2020 among Chinese A-share listed companies, we examine the moderating role played by executive team heterogeneity in the positive impact of controlling shareholder equity pledges on stock crash risk. We find that executive team heterogeneity of overseas background and age reduce the positive impact, while tenure heterogeneity increases the positive impact. Further evidence shows that political connections, ownership property and D&O liability insurance can induce different moderating effects of executive team heterogeneity in the relationship between equity pledges and stock price crash risk. Our study also contributes to helping listed companies effectively manage stock crash risk connected with equity pledges.
Using a comprehensive dataset for listed companies between 2010 and 2020, we document that social media coverage can reduce managers' incentives and capabilities to withhold bad news (i.e., reduce stock price crash risk). The results remain robust in the test of solving endogenous problems. Compared with other external governance mechanisms (other media sources, external auditors, financial analysts, and institutional shareholders), social media coverage plays a complementary role in reducing stock price crash risk when there is increased monitoring by other external monitoring mechanisms. Additional tests show that social media coverage reduces crash risk when managers have greater incentives to hoard bad news.
Climate change is a major and complex challenge currently facing the global economy, and significantly impacting the valuation of global financial assets and the financial system's stability. When the stock prices of large-scale listed companies fall sharply in a short time, we consider that a stock price crash. This paper constructs a novel measure of climate risk disclosure at the firm level by adopting a textual analysis method. We study whether climate risk exposure in listed company announcements can effectively reduce stock price crash risk. Studies have shown that, the more companies are concerned and disclose climate risk more positively, the lower the risk of stock price crash they face in the future. In addition, compared to alleviating the information asymmetry between internal managers and external investors, enhancing information disclosure to mitigate the risk of a stock price crash in the future is mainly achieved through the channel of raising the public's awareness of climate risk. Moreover, the mitigation effect of information disclosure related to climate risk on future stock price crash risk is more evident in manufacturing, mining, energy, agriculture, forestry, animal husbandry, and fishery directly threatened by climate change. In general, we encourage corporates to disclose the potential risks of climate change in the announcement of quarterly and annual reports in a standardized format.
This study investigates the impact of short-term loan rollover restrictions on stock price crash risk using a quasi-natural experiment of China's 2007 regulatory change. Our baseline results show that the rollover restriction reduces stock price crash risk. This effect is more pronounced for firms with higher agency costs or firms with a higher risk of government intervention. Transmission mechanism tests support the idea that rollover restrictions decrease stock price crash risk through information asymmetry and agency cost channels via enhanced monitoring. However, the rollover restriction also leads to a higher liquidity risk, although it does not dominate.
Environmental performances have gained great prominence for firms in recent years. This paper examines the impact of corporate environmental information disclosure (EID) on the stock price crash risk based on a large sample of Chinese listed companies in heavily polluting industries over the 2013–2019 period. We find that EID can reduce the stock price crash risk. The result holds after addressing potential concerns for endogeneity. Moreover, we deeply analyze the mediating mechanisms and identify that operational transparency and investors' reactions work as mediators while information authenticity works as a suppressor. Further, it is also found that Internet attention is plays a moderating role that strengthens the negative relationship between EID and the stock price crash risk. Our findings confirm the importance of EID in corporate operations and deliver multidimensional implications.
In this paper, we examine the effect of firms' employee relations, measured by the number of employee lawsuits divided by the total number of employees, on stock price crash risk. Firms with higher employee lawsuit ratios tend to have higher stock price crash risk. Our results are robust after addressing possible endogeneity and using alternative measures of employee relations and stock price crash risk. We also find that the association between the employee lawsuit ratio and stock price crash risk is less prominent for state-owned enterprises, for firms with stringent external monitoring, and for firms with positive earnings news. Finally, earnings aggressiveness appears to be the channel through which the employee lawsuit ratio affects stock price crash risk. Collectively, our study is in line with the stakeholder theory, and highlights the importance of employee lawsuit for preventing crash of stock price.
We examine whether a firm's voluntary disclosure of pandemic exposure increases stock price crash risk in a turbulent stock market caused by the spread of COVID-19 and other epidemic diseases. Pandemic risk is an unprecedented type of economic shock that alters the firm's stock price. Using an innovative firm-level pandemic exposure dataset based on the textual analysis of earnings conference calls, we show that there is a strong positive correlation between firm-level disclosure of pandemic exposure and one-quarter-ahead stock price crash risk.
JEL Classification
: E44, G12, G14, G32, I18
This study examines the difference in stock price crash risk between zero-leverage and non-zero-leverage firms. We find that zero-leverage firms have a significantly higher future stock price crash risk than non-zero-leverage firms. Next, we find that the positive relation between zero-leverage policy and future stock price crash risk is more pronounced when firms have higher controlling shareholders' ownership and foreign ownership. We also find that the positive relation is more pronounced for firms with low cash holdings than for those with high cash holdings. Further, we find that the positive relation is stronger for dividend-paying firms than non-dividend-paying firms. Our results are robust to alternative estimation specifications and endogeneity concerns. Overall, our findings shed light on the extent to which extreme corporate financial policy has an impact on future stock price crash risk. Our empirical evidence also provides meaningful implications for how stakeholders (especially investors) predict stock price crash risk in the context of extremely conservative capital structure.
This study examines the effects of shareholders’ trust on managers’ bad news hoarding. Using a large sample of listed firms from 33 countries, we find that firms domiciled in countries with higher societal trust have higher stock price crash risk, which indicates that managers may exploit shareholders’ trust to conceal bad news. We also find that the positive association between societal trust and crash risk is less pronounced (1) when low-trust foreign shareholders have greater control over a country’s firms, in line with low-trust shareholders’ concerns of being expropriated by managers and the consequent strong efforts at monitoring; (2) when long-term investors have greater control over a country’s firms, consistent with such investors playing an important role in corporate governance; and (3) when a country has strong formal institutions, such as investor protection and financial accounting systems, suggesting that robust formal institutions are required even in high-trust countries, contrary to the notion that trust can substitute for formal institutions.
Worldwide, there has been an ongoing debate about whether corporate social responsibility (CSR) can lead to better financial market performance, or whether corporations can do well by doing good. Working with a sample of all listed companies in China from 2010 to 2017, this study examines the impacts of three dimensions of CSR on stock price crash risk. We find that CSR, especially firms' responsibility to the environment and stakeholders, significantly reduces stock price crash risk, while social contributions such as charitable donations have no significant effect on stock crash risk. Attracting long-term institutional investors is the primary mechanism through which CSR can curb crash risk. Mitigating earnings management is also a channel through which overall CSR and stakeholder responsibility contribute to a lower stock crash risk. Finally, we find that stakeholder responsibility and environmental responsibility can help improve stock market performance.
Purpose
The main purpose of this study is to use a new broad board effectiveness index , which has been created from several internal attributes of board of directors and to investigate the association of the overall index regarding stock price crash risk.
Design/methodology/approach
The authors create a new board effectiveness index from a comprehensive set of board attributes, including the number of board meetings, the number of board attendances, the expertise of the directors, the size of the board and the number of independent directors, in order to test with the stock price crash risk by using panel regression models with fixed effects. The two-stage least squared regression ensures endogeneity issues.
Findings
An increase in board effectiveness index lowers firm-specific crash risk. Moreover, female directors enhance the board effectiveness.
Originality/value
With a new broad board effectiveness index , this paper is unique from other studies as the authors focus on the overall index rather than on a single dimension of board attributes.
This paper empirically examines the relationship between idiosyncratic volatility, skewness, and kurtosis and future stock returns. We find evidence of significant time-series variation in the average idiosyncratic moments. However, the single and double sorted portfolio-based tests show that only the expected idiosyncratic skewness and volatility have some pricing effects reflected in significant differences in the returns of extreme portfolios. Cross-sectional tests using portfolios of stocks sorted on expected idiosyncratic kurtosis, but not individual stocks, reveal that only the expected idiosyncratic skewness is consistently priced with a significant and negative relationship with expected returns. Furthermore, there is strong evidence that the maximum daily return (MAXRET) is highly significant in all tested models suggesting that stocks with extreme positive returns tend to decline in price in subsequent month, leading to negative returns.
Using a large sample of U.S. firms, we find that major corporate customer concentration is positively associated with a firm's future stock price crash risk. This positive relation is more pronounced when the supplier firms have made a higher level of relationship-specific investments, have a poorer information environment, and/or face lower customer switching costs. Our evidence suggests that exposure to an undiversified corporate customer base can have a negative bearing on a firm's crash risk.
We investigate the impact of customer concentration on stock price crash risk. Customer concentration may represent a source of significant cash flow and business risk for supplier firms or benefit supplier firms in terms of efficient product, inventory and supply chain management. Using a large sample of firms for the period 1977–2016, we find that corporate customer concentration is positively associated with stock price crash risk. We find, however, that government customer concentration is negatively associated with stock price crash risk. Further analyses demonstrate that our results are robust to potential endogeneity and reverse causality concerns. In the cross-sectional analyses, we find that the likelihood that a supplier firm with a concentrated customer base experiences higher crash risk is attenuated by lower switching cost and is accentuated when the degree of information asymmetry is high.
We examine how product market competition (PMC) shapes CEO power. Using various measures to capture both PMC and CEO power, our analyses, which includes a quasi‐natural experiment, finds evidence that CEOs have less power when the product market is more competitive. Furthermore, the impact of PMC on CEO power is more pronounced for firms where management are entrenched, where there is lower CEO ownership and lower analyst coverage, and for firms experiencing good “luck” (windfall performance). Our results suggest that market power can act as a substitute for corporate governance in disciplining CEO power, particularly when prone to agency problems. This article is protected by copyright. All rights reserved.
Both stock price synchronicity and crash risk are negatively related to the firm’s ownership by dedicated institutional investors, which have strong incentive to monitor due to their large stake holdings and long investment horizons. In contrast, the relations become positive for transient institutional investors as they tend to trade rather than monitor. These findings suggest that institutional monitoring limits managers’ extraction of the firm’s cash flows, which reduces the firm-specific risk absorbed by managers, thereby leading to a lower R2. Moreover, institutional monitoring mitigates managerial bad-news hoarding, which results in a stock price crash when the accumulated bad news is finally released.
We investigate the relation between the transparency of financial statements and the distribution of stock returns. Using earnings management as a measure of opacity, we find that opacity is associated with higher R2s, indicating less revelation of firm-specific information. Moreover, opaque firms are more prone to stock price crashes, consistent with the prediction of the Jin and Myers [2006. R2 around the world: new theory and new tests. Journal of Financial Economics 79, 257–292] model. However, these relations seem to have dissipated since the passage of the Sarbanes-Oxley Act, suggesting that earnings management has decreased or that firms can hide less information in the new regulatory environment.