The Effect Of Ownership Structure On Future Stock Price Crash Risk: Korean Evidence

Abstract

This paper examines the effect of ownership structure on firm-specific stock price crash risk using listed firm (KOSPI) data in Korea. Prior literatures suggest that corporate governance has an impact on the level of disclosure and the quality. Managers may stockpile negative information about the company, but when such accumulated bad news crosses a threshold, the negative information suddenly becomes publicly available and a stock price crash is observed (Hutton, Marcus, & Tehranian, 2009). Prior studies have documented the determinants of future stock price crash risk (Jin & Myer, 2006; Hutton et al. 2009; Kim, Li, & Zhang, 2011; Hamm, Li, & Ng, 2013; Xu, Jiang, Chan, & Yi, 2013; Jo, Moon, & Choi, 2015; Kim & Zhang, 2016). However, it is hard to find the papers about corporate ownership and future stock price crash risk at the term of determinants of the risk. Compare to some financially advanced countries where ownership and management are effectively separated, there is no clear distinction between ownership and management in Korea. Using the percentage of managerial ownership and that of foreign ownership as proxies for ownership structure and measures for future stock price crash risk which was used by Callen and Fang (2013, 2015) and Kim and Zhang (2016), we conducted an empirical analysis examining the link between corporate ownership structure and companies’ subsequent stock price crash risk. We collect 4,294 firm-year observations listed on Korean market from 2002 to 2015, and we use the measures of firmspecific stock price crash risk based on Callen and Fang (2013; 2015) to examine the relation between corporate ownership structure and subsequent stock price crash risk. From the empirical tests, the percentage of managerial ownership is negatively associated with future stock price crash risk. It implies that managerial ownership increases to align the interests of shareholders and managers, it could alleviate the agency problem between them (Jensen & Meckling, 1976), helping to resolve information asymmetry and prevent bad news from being withheld, ultimately lowering future stock price crash risk. In addition, we find that higher foreign ownership significantly weakens the negative relation between the percentage of managerial ownership and future stock price crash risk. We interpret this results that the negative side of foreign ownership failed to effectively reduce agency costs, weakening the negative correlation between managerial ownership and future stock price crash risk. Our study may shed some light on the understanding of the ownership structure as a determinant of future stock price crash risk to firms and investors who want to handle crash risk in the stock market.