The Effect of Managerial Ability on Future Stock Price Crash Risk: Evidence from Korea

Soo Park,Hoon Jung

doi:10.3390/su9122334

Soo Park, Hoon Jung

Open Access

https://doi.org/10.3390/su9122334

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Abstract

This study examines the effect of managerial ability on subsequent stock price crash risk using listed firm data in Korea. Compared to some financially advanced countries, the influence of managers is particularly more powerful in Korea, as ownership and management are not effectively separate in most Korean firms. In addition, we considered the effect of large business groups called Chaebol, which is family-run conglomerates with unique corporate governance system that hugely affect the Korean economy. It is important to recognize determinants of the stock price crash risk which would result in doubt on going concern to enhance the company’s sustainable management. Hence, this study focuses on the managerial ability as one of the main factors of the stock price crash risk. We use the measures of firm-specific stock price crash risk based on Hutton et al. (2009). Managerial ability is estimated through a Data Envelopment Analysis (DEA) and tobit regressions following Demerjian et al. (2012). From the empirical tests, there is a negative association between managerial ability and stock price crash risk. This suggests that managers with a higher ability release more voluntary disclosure to signal their ability, ultimately lowering the subsequent stock price crash risk. We also find that firms in large business groups, Chaebol, weaken the negative association between managerial ability and subsequent stock price crash risk.

Highlights

This paper aims to analyze the relationship between managerial ability and subsequent stock price crash risk
We focused our attention on managerial ability and conducted an empirical analysis on the relationship between managerial ability and future stock price crash risks; we examined whether higher managerial ability would allow timely disclosure of corporate information, leading to a lower future stock price crash risk, or it would rather motivate managers to hoard bad news out of reputational and career concerns, resulting in a higher future stock price crash risk
Using the Data Envelopment Analysis (DEA) method suggested by [14] to measure managerial ability and market-based measure for subsequent stock price crash risk which was used by [7], we examined the relationship between managerial ability and stock price crash risk by conducting empirical analysis

Summary

Introduction

This paper aims to analyze the relationship between managerial ability and subsequent stock price crash risk. Several studies suggest that firm-level evidence such as tax avoidance, discretionary accruals and biased earnings forecast could affect the level of disclosure of bad news, which is positively related with subsequent stock price crash risk [8,9,10]. Firm-specific stock price crash refers to a phenomenon in which stock prices plummet due to excessive negative information poured all at once after bad news accumulates within companies [7]. Reference [19] explored the association between conditional conservatism and firm-level stock price crash Their empirical analysis showed that the greater the degree of conservatism, the less the probability of a future share price collapse and such a relationship is stronger in an environment with large information asymmetry as measured by R&D costs, industrial competitiveness and financial analysts’ numbers. Using data of 13 emerging market countries, Reference [24] showed that companies with superior disclosure policies have a low risk of stock price crash, suggesting that company’s disclosure policy affects stock price crash risk

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