ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

Largest Shareholder’s Ownership and Stock Price Crash Risk

  • Lee, Se－Young The Catholic University of Korea

Asian Tax Journal Vol. 19 No. 1 (2018), pp. 115-141

Abstract

After Hutton et al.(2009)’s seminal paper, most studies on stock price crash risk have examined the relation between the opacity of firms’ information environment and stock price crash risk based on the agency problem between stock owners and managers. In addition, the agency problem between largest owners and minor stock holders is also another source of the opacity as well as the agency problem between stock holders and managers. Largest owners are inclined to gain private profits through their dominant controls for the firms(Entrenchment hypothesis). However, they also have incentives to align their interests with minor stock holders’ interests to support the stock price(Alignment hypothesis). To provide the empirical evidence on these two opposite hypotheses, this study examined whether stock price crash risk stems from the opacity driven from the agency problem between largest shareholders and minor stock owners. To do so, this study selected 7,136 firm-years listed on the Korean Stock Market for the period from 2000 to 2015. As a result, stock price crash risk decreases with largest shareholders’ ownership. This result is shown consistently 1) when the non-linearity between largest shareholder owners and stock price crash risk is controlled for, 2) when the opacity suggested by Hutton et al.(2009) is controlled for, 3) when stock price crash risk is measured differently. Therefore, following the alignment hypothesis, Korean firms are likely to disclose bad news timely, not to hoard them.

Keywords

  • Largest shareholders’ownership
  • Stock price crash risk
  • Agency problem

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Asian Tax Journal

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