Stock return volatility and financial distress: Moderating roles of ownership structure, managerial ability, and financial constraints

Abstract

This study examines the relationship between stock return volatility (SRV) and financial distress (FD) and the moderating roles of ownership structure, managerial (CEO) ability, and financial constraints in this nexus. Using a panel sample of Vietnamese-listed companies from 2010 to 2020, we find that firms experiencing high SRV encounter more FD. Our finding is robust to alternative measures of both SRV and FD variables. Large-cap and low-leverage firms bear less FD risk owing to excessive stock return volatility than small-cap and high-leverage companies. Additional analyses reveal that the presence of state ownership mitigates FD likelihood while the presence of institutional and concentrated ownership exacerbates FD probability when heightened SRV. Further, an adverse impact of SRV on the firm's stability is more pronounced in companies with strong CEO power and less financial constraints. This research provides deep insights for corporate executives and policy-makers on the relationship between SRV and FD. Furthermore, it underscores the necessity of managing stock return volatility to ensure the stability of listed firms in emerging markets.