From low resource slack to inflexibility: The share price effect of operational efficiency

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 beyond the optimal level 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 in the pursuit of efficiency.