Corporate social activities and stock price crash risk in the banking industry: International evidence

Kun Tracy Wang, Simeng Liu and Yue Wu

Journal of International Financial Markets, Institutions and Money, 2021, vol. 74, issue C

Abstract: This paper investigates the impact of banks’ social activities on their future stock price crash risk in an international setting. We propose two competing perspectives for the relationship. Signaling theory suggests that a high level of social engagement may signal high ethical standards of bank managers that tend to maintain financial transparency and are less likely to engage in bad news hoarding activities (i.e., concealing bad news from investors). Therefore, increased social activities are expected to be associated with reduced stock price crash risk. From the agency-cost perspective, social activities could be used as a tool by bank managers to divert shareholders’ attention and reduce the likelihood of stakeholders blowing the whistle on managerial misbehavior, which may increase managerial bad news hoarding and banks’ stock price crash risk. Using a comprehensive sample of 3,528 bank-year observations in 41 countries from 2003 to 2017, we find a positive relationship between banks’ social engagement and future stock price crash risk. This positive relationship is attenuated for banks with greater external monitoring and banks located in countries with stronger legal protection of investors and greater official supervisory power over the banking industry. We also show that banks’ social engagement is positively associated with the release of unexpected very bad news and managerial opportunistic behaviors in the future, supporting the agency-cost perspective of banks’ social activities. Overall, our findings reveal a negative side of banks’ social activities, suggesting that engaging in social activities may facilitate bank managers’ bad news hoarding behavior and increase future stock price crash risk in the banking industry.

Keywords: Corporate social responsibility; Bad news hoarding; Crash risk; Agency theory; Signaling theory (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:74:y:2021:i:c:s1042443121001311

DOI: 10.1016/j.intfin.2021.101416

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