A critique of the agency theory viewpoint of stock price crash risk: The opacity and overinvestment channels

Andreou, Panayiotis C.; Lambertides, Neophytos; Magidou, Marina

Abstract

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 nonsignificant, 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.

Citation

Andreou, P. C., Lambertides, N., & Magidou, M. (2023). A critique of the agency theory viewpoint of stock price crash risk: The opacity and overinvestment channels. British Journal of Management, 34(4), 2158-2185. https://doi.org/10.1111/1467-8551.12693

• Journal Article Type: Article
• Acceptance Date: Oct 26, 2022
• Online Publication Date: Dec 19, 2022
• Publication Date: 2023-10
• Deposit Date: Oct 27, 2022
• Publicly Available Date: Jan 17, 2023
• Journal: British Journal of Management
• Print ISSN: 1045-3172
• Electronic ISSN: 1467-8551
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 34
• Issue: 4
• Pages: 2158-2185
• DOI: https://doi.org/10.1111/1467-8551.12693
• Public URL: https://durham-repository.worktribe.com/output/1187904