ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

Investment Inefficiency and Stock Price Crash Risk

  • Lee, Se－Young The Catholic University of Korea

Asian Tax Journal Vol. 20 No. 1 (2019), pp. 189-221

Abstract

This study analyzes whether a firm’s investment inefficiency leads to stock price crash risk, compared with prior studies explaining the stock price crash risk as a result of the accounting opacity surrounding the firm’s information environment. The investment of a firm is likely to be executed to reach the maximization of the firm value. Therefore, if the investment is executed inefficiently, the probability of stock price crash is increased following the stock price decrease stemming from the reduction of the firm value. In addition, Fairfield et al.(2003), McNichols and Stubben(2008), Kedia and Philippon(2009), and Zhu(2016) argue that the firm’s investment is simultaneously correlated with accruals with a high degree. Their argument implies that the causality shown in prior studies that accounting opacity leads to stock price crash risk is likely to be reversed. In other words, it is likely that the investment inefficiency affects accounting opacity, leading to the stock price crash risk. To examine the possibility, this study selects 11,898 firm-years from the manufacturing firms with the fiscal year-end of December during the period from 1994 to 2016. The results are follows. First, as expected, as the firm’s investment inefficiency is worse, the stock price crash risk is increased. Second, the result is not changed when other measures of the stock price crash risk are used. Third, the result is not also changed when the accounting opacity is controlled for. Fourth, when the sample is separated into two groups, under-investment vs. over-investment, the stock price crash risk is observed in the over-investment sample, not on the under-investment sample. Thus study contributes to the literature by showing that the stock price crash risk can be increased through the firm’s real activity, investment, as well as the traditional concept, information asymmetry between managers and outside users of information, which has been using in popular in the prior studies.

Keywords

  • Investment inefficiency
  • Stock price crash risk
  • Accruals
  • Opacity

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