What accounts for the effect of sustainability engagement on stock price crash risk during the COVID-19 pandemic—Agency theory or legitimacy theory?

Junru Zhang, Chen Zheng and Yuan George Shan

International Review of Financial Analysis, 2024, vol. 93, issue C

Abstract: In this study, we conduct a textual analysis of the third-party disclosure of corporate sustainability news focused on the Standard and Poor's 500 firms in the United States market during the first and second quarter of 2020. We find a positive relationship between corporate sustainability news release and firm-specific stock price crash risk. This finding is surprising, but it indeed aligns with agency theory. It indicates that the coronavirus disease (COVID-19) pandemic exacerbated the tendency of managers under increasing financial pressure to use the sustainability information release as a mechanism to mask and withhold bad news for extended periods at the expense of shareholders. This tendency results in high stock price crash risk. Our results are robust to alternative empirical specifications, estimation methods, and tests for endogeneity. Moreover, additional evidence reveals that agency theory dominates legitimacy theory in explaining the effect of sustainability on this risk during the COVID-19 pandemic.

Keywords: Sustainability engagement; COVID-19; Agency theory; Legitimacy theory; Stock price crash risk; Media coverage (search for similar items in EconPapers)
JEL-codes: E02 G14 G30 M14 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:93:y:2024:i:c:s1057521924000991

DOI: 10.1016/j.irfa.2024.103167

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