Are financially constrained firms susceptible to a stock price crash?

He, Guanming; Ren, Helen Mengbing

doi:10.1080/1351847x.2022.2075280

Cited by 32 publications

(25 citation statements)

References 101 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…In addition, institutional investors' (analyst_cov) monitoring mechanism is negatively associated with insider sales. Financial constraints (WW) are positively associated with insider trading, which is supported by recent findings from He and Ren (2022). Finally, a one-year lag in insider sales (llnetsales) is positively related to current insider sales (He et al, 2021).…”

Section: Mandatory Audit Rotationsupporting

confidence: 65%

“…Second, we controlled for stdearnings (the standard deviation of income before extraordinary items in the current and previous four years) and ReturnSD (the standard deviation of stock returns), which are used as proxies for information asymmetry and are expected to be positively correlated with insider sales (He et al, 2021). Third, we controlled for WW, the financial constraints of the firm developed by Whited and Wu (2006), which are expected to be either negatively (Ataullah et al, 2014a(Ataullah et al, , 2014bHe et al, 2021) or positively associated with insider sales (He and Ren, 2022), depending on how insiders perceive the default risks of the firms and whether they care about their long-term compensation and career prospects in their firms. Fourth, we included institution_own (the institutional holding percentages) and analyst_cov (the number of analysts that make at least one earnings forecast for a firm in the fiscal year) (He et al, 2021).…”

Section: Empirical Modelmentioning

confidence: 99%

See 1 more Smart Citation

Does mandatory audit rotation affect insider trading? Evidence from China

Xiao

Xi²,

Meng³

2023

MAJ

View full text Add to dashboard Cite

Purpose This study aims to investigate the impact of mandatory audit partner rotation (MAPR) on Chinese listed firms’ insider trading, as well as the moderating effects of firm characteristics on this impact. The economic mechanism behind this impact is also explored. Design/methodology/approach This study conducts a regression analysis on firms associated with mandatory and voluntary audit partner rotation based on 2009–2019 firm data and examines whether corporate insiders of these two types of firms increase their share sales within 12 months before their financial statements are submitted to a new rotated auditor. Findings Client firms’ corporate insiders increase their share sales within 12 months before their financial statements are submitted to a new mandatory rotated auditor. In addition, such an association is less pronounced for client firms that changed from Big 4 auditors to those with higher financial constraints. This is more pronounced for client firms with higher information asymmetry. The economic mechanism of the finding is that is the MAPR implementation reduces earnings management activities from client firms. Moreover, client firms’ buy-and-hold stock returns decline in the first year after MAPR. Research limitations/implications This study should assist investors, corporate shareholders and Chinese policymakers. Investors can be well protected through the adoption of MAPR because upcoming auditors enhance the audit quality of clients by restraining managers’ manipulation of reported earnings and declining firms’ insider trading afterwards. Investors, Chinese policymakers and corporate shareholders should pay more attention to firms’ financial report quality, auditor selection, financial situation, corporate governance and the information environment. Explicitly, firms with less transparent financial report quality, non-big 4 auditors and fewer financial constraints are more likely to be involved in insider trading. Originality/value To the best of the authors’ knowledge, none of the extant studies have examined the impact of MAPR on insider sales. This study extends the research on the effect of the audit process on firm market performance by investigating the impact of audit partner rotation policy on insider trading behaviors.

show abstract

Section: Mandatory Audit Rotationsupporting

confidence: 65%

Section: Empirical Modelmentioning

confidence: 99%

Does mandatory audit rotation affect insider trading? Evidence from China

Xiao

Xi²,

Meng³

2023

MAJ

View full text Add to dashboard Cite

show abstract

“…Additionally, we select the one-period lagged sector market capitalization, price-to-earnings ratio, quick ratio (current assets/current liabilities), inventory-to-income ratio, return on net assets, and dividend distribution ratio as sector control variables

. In addition, we control for firm-specific crash risk to exclude the impact of a single heterogeneous risk ( Hutton et al, 2009 ; Kim et al, 2011 ; He et al, 2019 , 2021 ; He and Ren, 2022 ). We use crashrisk to measure firm-specific risk, which equals 1 if a firm experiences a weekly return falling 3.2 standard deviations below the average weekly return for a fiscal year.…”

Section: Empirical Analysis Based On the Tail Volatility Spillover Ne...mentioning

confidence: 99%

“…In contrast to the preceding literature, we attempt to understand the Chinese stock market crash 1 from the perspective of right-tail risk. Moreover, one can be concerned that systemic risk is likely driven by firm-specific crash risk rather than a cross-sectoral risk contagion ( Hutton et al, 2009 ; Kim et al, 2011 ; Callen and Fang, 2013 , 2015 ; Kim and Zhang, 2016 ; Andreou et al, 2017 ; Chang et al, 2017 ; He et al, 2019 ; Lobo et al, 2020 ; He et al, 2021 ; He and Ren, 2022 ). To alleviate this crucial concern, we account for firm-specific crash risk in the LR-EGARCH-TENENT model, and the empirical results demonstrate that our key conclusions are robust when firm-specific crash risk is controlled.…”

Section: Introductionmentioning

confidence: 99%

Will a boom be followed by crash? A new systemic risk measure based on right-tail risk

Liu

Xu²,

Xiong³

2023

Front. Psychol.

View full text Add to dashboard Cite

In this study, we demonstrate that high short-term gains on the A-share market may lead to significant losses in the future and potentially cause a market catastrophe. To study the accumulation, outbreak, and cross-sector spillover process of systemic risk in the Chinese stock market, we define right-tail risk as a large rally process that may lead to left-tail losses in the future and construct a tail volatility spillover network by distinguishing between left-tail and right-tail risk. In the risk accumulation process, the market expectation bias of common shocks considerably magnifies heterogeneity risk, and in the risk outbreak and spillover processes, the greatest systemically important and systemically susceptible sectors are banking and information technology, respectively. In addition, the level of risk spillover is extremely sensitive to tail shocks and increases as tail shocks intensify. Moreover, right-tail risk has more forward-looking predictive power for left-tail risk. Apart from achieving immediate regulatory objectives, Chinese authorities must consider market expectation bias when implementing rules. Additionally, authorities want to be wary of right-tail risk, which has the potential to create serious and pervasive damage in the future if the market is allowed to be unregulated during short-term spikes.

show abstract

“…Following Andreou, Andreou and Lambertides (2021) and He and Ren (2022), we employ the negative coefficient of the standardized minimum return:…”

Section: Measuring Stock Price Crashesmentioning

confidence: 99%

A Critique of the Agency Theory Viewpoint of Stock Price Crash Risk: The Opacity and Overinvestment Channels

Andreou

Lambertides

Magidou

2022

British J of Management

View full text Add to dashboard Cite

This study documents a puzzling historical trend in crash risk for US-listed firms: between 1950 and 2019, the firm-year occurrences of idiosyncratic stock price crashes rose from 5.5% to an astonishing 27%. The vastness of the literature notoriously attributes crashes to agency reasons, i.e. self-interested executives who strategically camouflage bad news via the financial reporting opacity and overinvestment channels. Nonetheless, we document that the opacity-and overinvestment-crash relations are non-significant, especially in the period following the enforcement of the Sarbanes-Oxley Act. The statistically nonsignificant relations are also witnessed in tests that account for the effect of equity-based compensation incentives and corporate governance functions. Overall, this study criticizes the efficacy of opacity and overinvestment as channels in explaining crash risk. Our conclusions offer avenues for future research to pursue in rationalizing the puzzling surge in stock price crashes.

show abstract

Are financially constrained firms susceptible to a stock price crash?

Cited by 32 publications

References 101 publications

Does mandatory audit rotation affect insider trading? Evidence from China

Does mandatory audit rotation affect insider trading? Evidence from China

Will a boom be followed by crash? A new systemic risk measure based on right-tail risk

A Critique of the Agency Theory Viewpoint of Stock Price Crash Risk: The Opacity and Overinvestment Channels

Contact Info

Product

Resources

About