Divergence of Cash Flow and Voting Rights, Opacity, and Stock Price Crash Risk: International Evidence

This study investigates whether and how the deviation of cash flow rights (ownership) from voting rights (control), or simply the ownership-control wedge, influences the likelihood that extreme negative outliers occur in stock return distributions, which we refer to as stock price crash risk. We do...

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Bibliographic Details
Published inJournal of accounting research Vol. 55; no. 5; pp. 1167 - 1212
Main Authors HONG, HYUN A., KIM, JEONG-BON, WELKER, MICHAEL
Format Journal Article
LanguageEnglish
Published Chicago Wiley Subscription Services, Inc 01.12.2017
Blackwell Publishing Ltd
Subjects
Cash flow
Companies
Deviation
G12
IFRS
information opacity
K22
M41
Ownership
ownership‐control wedge
Panel data
Prone
stock price crash risk
Stock prices
Stocks
Voting rights
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Summary:This study investigates whether and how the deviation of cash flow rights (ownership) from voting rights (control), or simply the ownership-control wedge, influences the likelihood that extreme negative outliers occur in stock return distributions, which we refer to as stock price crash risk. We do so using a comprehensive panel data set of firms with a dual-class share structure from 20 countries around the world for the period of 1995–2007. We predict and find that opaque firms with a large wedge are more crash prone than opaque firms with a small wedge. In addition, we predict and find that the positive relation between the wedge and crash risk is less pronounced for firms with more effective external monitoring and for firms with greater growth opportunities. The results of this study are broadly consistent with Jin and Myers's theory that agency costs, combined with opacity, exacerbate stock price crash risk.
Bibliography:http://research.chicagobooth.edu/arc/journal-of-accounting-research/online-supplements
Accepted by Christian Leuz. We are grateful to an anonymous referee, Darren Henderson, and Ph.D. seminar/workshop participants at City University of Hong Kong, Concordia University, Fudan University, Sun Yat‐sen University, University of Waterloo, and the Ivey Business School at the University of Western Ontario for comments on a previous version of the paper. J.‐B. Kim acknowledges partial financial support for this project from the J. Page R. Wadsworth Chairship in Accounting and Finance at University of Waterloo. M. Welker acknowledges research support from the KPMG Fellowship at the Smith School of Business at Queen's University. All errors are, of course, our own. An online appendix to this paper can be downloaded at
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ISSN:0021-8456
1475-679X
DOI:10.1111/1475-679X.12185