Stock price crash risk: A critique of the agency theory viewpoint

Abstract

This paper explores the puzzling trend observed in US-listed firms between 1950 and 2018; specifically, firm-specific stock price crashes rose from 6.5 percent to an astonishing 27 percent. The burgeoning literature attributes stock price crashes to agency-related problems resulting from managerial opportunism that seeks to camouflage bad news through the channels of financial reporting opacity and overinvestment. Our study offers empirical evidence suggesting that these agency-based channels play a limited role in explaining this increasing frequency of stock price crashes. We show, especially in the post-SOX period, that a statistical relationship between the two prominent channels and future stock price crashes is notably absent. This study contributes to the literature by bringing to the fore the stock price crash risk puzzle, for which a prominent explanation in the post-SOX era remains largely undetermined. Further, the study discusses possible explanations wherein future research can look for answers.