Corporate Governance and Stock Price Crash Risk: Insights from an Emerging Market

Abstract

This study provides empirical evidence of the multifaceted impact of corporate governance on stock price crash risk within the distinctive corporate governance landscape of the Pakistan Stock Exchange. Utilizing data from all non-financial firms listed on the Pakistan Stock Exchange, the study employs a robust methodology to control for potential endogeneity and reverse causality issues commonly encountered in corporate governance research. The findings reveal a dominance of family firms in the Pakistani market, holding majority control over boards and decision-making processes. Contrary to expectations, these corporate boards and family ownership structures do not contribute to the reduction of crash risk. However, the presence of block ownership indicates that institutional investors are predominantly short-term participants. In alignment with previous research, institutional investors in this context tend to play a passive and negative role in monitoring firms. Rather than applying monitoring pressure, they exhibit a tendency to exit, further contributing to price reductions and subsequent crashes. These insights underscore the necessity for market regulators to develop a corporate governance framework that not only ensures investor protection but also encourages firms to diminish information asymmetry through improved disclosure and transparency practices.