The Effect of Managerial Ability on Future Stock Price Crash Risk: Evidence from Korea

Soo Yeon Park and Hoon Jung
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Soo Yeon Park: Institute for Business Research & Education, Korea University, Seoul 02841, Korea
Hoon Jung: Department of Telecommunications & Spectrum Research, Korea Information Society Development Institute, Jincheon-gun 27872, Korea

Sustainability, 2017, vol. 9, issue 12, 1-17

Abstract: This study examines the effect of managerial ability on subsequent stock price crash risk using listed firm data in Korea. Compared to some financially advanced countries, the influence of managers is particularly more powerful in Korea, as ownership and management are not effectively separate in most Korean firms. In addition, we considered the effect of large business groups called Chaebol, which is family-run conglomerates with unique corporate governance system that hugely affect the Korean economy. It is important to recognize determinants of the stock price crash risk which would result in doubt on going concern to enhance the company’s sustainable management. Hence, this study focuses on the managerial ability as one of the main factors of the stock price crash risk. We use the measures of firm-specific stock price crash risk based on Hutton et al. (2009). Managerial ability is estimated through a Data Envelopment Analysis (DEA) and tobit regressions following Demerjian et al. (2012). From the empirical tests, there is a negative association between managerial ability and stock price crash risk. This suggests that managers with a higher ability release more voluntary disclosure to signal their ability, ultimately lowering the subsequent stock price crash risk. We also find that firms in large business groups, Chaebol, weaken the negative association between managerial ability and subsequent stock price crash risk.

Keywords: managerial ability; stock price crash risk; data envelopment analysis; large business groups (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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