Financial distress and stock price crash risk in Egyptian firms
-
DOIhttp://dx.doi.org/10.21511/imfi.20(3).2023.26
-
Article InfoVolume 20 2023, Issue #3, pp. 311-320
- Cited by
- 450 Views
-
133 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
Economic policy uncertainty intensified as a result of the global financial crisis. To overcome these obstacles, firms handle issues with financial distress and crash risk more proactively. This paper offers new insights into the relationship between financial distress and crash risk on the Egyptian stock market during the period of 2014–2021 and presents how managers strengthen the bad news hoarding mechanism to their advantage. Data were collected via financial statements and reports obtained from the Thomson Reuters database using 824 annual observations of 103 Egyptian firms via the generalized method of moments and ordinary least squares. Results show a strong positive impact of financial distress on crash risk using OLS and GMM. Results support the role of managerial opportunism to cover up bad news that undermines a firm’s economic fundamentals. The findings support an agency theory of how financial distress affects crash risk. The findings support conducting robust tests for alternative financial distress and crash risk measures.
- Keywords
-
JEL Classification (Paper profile tab)M41, G39, G50
-
References47
-
Tables7
-
Figures0
-
- Table 1. Distribution of the relevant sectors
- Table 2. Measurements of variables
- Table 3. Descriptive statistics
- Table 4. Correlation table
- Table 5. Diagnostics tests
- Table 6. The effect of financial distress on the crash risk
- Table 7. Robustness test
-
- Abdel-Wanis, E., & Rashed, A. (2023). The Impact of Information Asymmetry on the Relationship between Board Characteristics and Capital Structure. Journal of Applied Business & Economics, 25(1).
- An, Z., Chen, C., Naiker, V., & Wang, J. (2020). Does media coverage deter firms from withholding bad news? Evidence from stock price crash risk. Journal of Corporate Finance, 64, 101664.
- Andreou, C. K., Andreou, P. C., & Lambertides, N. (2021). Financial distress risk and stock price crashes. Journal of Corporate Finance, 67, 101870.
- Andreou, P. C. (2015). Effects of market default risk on index option risk-neutral moments. Quantitative Finance, 15(12), 2021-2040.
- Andreou, P. C., Antoniou, C., Horton, J., & Louca, C. (2016). Corporate governance and firm-specific stock price crashes. European Financial Management, 22(5), 916-956.
- Andreou, P. C., Cooper, I., Louca, C., & Philip, D. (2017a). Bank loan loss accounting treatments, credit cycles and crash risk. The British Accounting Review, 49(5), 474-492.
- Andreou, P. C., Louca, C., & Petrou, A. P. (2017b). CEO age and stock price crash risk. Review of Finance, 21(3), 1287-1325.
- Benmelech, E., Kandel, E., & Veronesi, P. (2010). Stock-based compensation and CEO (dis) incentives. The Quarterly Journal of Economics, 125(4), 1769-1820.
- Bharath, S. T., & Shumway, T. (2008). Forecasting default with the Merton distance to default model. The Review of Financial Studies, 21(3), 1339-1369.
- Bleck, A., & Liu, X. (2007). Market transparency and the accounting regime. Journal of Accounting Research, 45(2), 229-256.
- Callen, J. L., & Fang, X. (2013). Institutional investor stability and crash risk: Monitoring versus short-termism? Journal of Banking & Finance, 37(8), 3047-3063.
- Campbell, J. Y., Hilscher, J., & Szilagyi, J. (2008). In search of distress risk. The Journal of Finance, 63(6), 2899-2939.
- Chang, X., Chen, Y., & Zolotoy, L. (2017). Stock liquidity and stock price crash risk. Journal of Financial and Quantitative Analysis, 52(4), 1605-1637.
- Charitou, A., Dionysiou, D., Lambertides, N., & Trigeorgis, L. (2013). Alternative bankruptcy prediction models using option-pricing theory. Journal of Banking & Finance, 37(7), 2329-2341.
- Charitou, A., Lambertides, N., & Trigeorgis, L. (2007). Earnings behaviour of financially distressed firms: The role of institutional ownership. Abacus, 43(3), 271-296.
- Chen, C., Kim, J.-B., & Yao, L. (2017). Earnings smoothing: does it exacerbate or constrain stock price crash risk? Journal of Corporate Finance, 42, 36-54.
- Chen, J., Hong, H., & Stein, J. C. (2001). Forecasting crashes: Trading volume, past returns, and conditional skewness in stock prices. Journal of Financial Economics, 61(3), 345-381.
- Cui, H., & Zhang, Y. (2020). Does investor sentiment affect stock price crash risk? Applied Economics Letters, 27(7), 564-568.
- Dai, J., Lu, C., & Qi, J. (2019). Corporate social responsibility disclosure and stock price crash risk: Evidence from China. Sustainability, 11(2), 448.
- Deng, X., Gao, L., & Kim, J. B. (2020). Short-sale constraints and stock price crash risk: Causal evidence from a natural experiment. Journal of Corporate Finance, 60, 101498.
- Fu, J., Wu, X., Liu, Y., & Chen, R. (2021). Firm-specific investor sentiment and stock price crash risk. Finance Research Letters, 38, 101442.
- Habib, A., Hasan, M. M., & Jiang, H. (2018). Stock price crash risk: review of the empirical literature. Accounting & Finance, 58, 211-251.
- He, G., & Ren, H. M. (2022). Are financially constrained firms susceptible to a stock price crash? The European Journal of Finance, 1-26.
- Hillegeist, S. A., Keating, E. K., Cram, D. P., & Lundstedt, K. G. (2004). Assessing the probability of bankruptcy. Review of Accounting Studies, 9(1), 5-34.
- Hong, H., & Stein, J. C. (2003). Differences of opinion, short-sales constraints, and market crashes. The Review of Financial Studies, 16(2), 487-525.
- Hou, C., & Liu, H. (2023). Institutional cross-ownership and stock price crash risk. Research in International Business and Finance, 101906.
- Hutton, A. P., Marcus, A. J., & Tehranian, H. (2009). Opaque financial reports, R2, and crash risk. Journal of financial Economics, 94(1), 67-86.
- Jin, L., & Myers, S. C. (2006). R2 around the world: New theory and new tests. Journal of Financial Economics, 79(2), 257-292.
- Khalil, M., & Rashed, A. (2023). The Impact of Female Directors on the Relationship between Corporate Social Responsibility and Capital Structure: Evidence from Egypt. The Journal of Applied Business and Economics, 25(2), 171-184.
- Kim, J. B., & Zhang, L. (2016). Accounting conservatism and stock price crash risk: Firm-level evidence. Contemporary Accounting Research, 33(1), 412-441.
- Kim, J. B., Li, X., Luo, Y., & Wang, K. (2020). Foreign investors, external monitoring, and stock price crash risk. Journal of Accounting, Auditing & Finance, 35(4), 829-853.
- Kim, J. B., Li, Y., & Zhang, L. (2011b). Corporate tax avoidance and stock price crash risk: Firm-level analysis. Journal of Financial Economics, 100(3), 639-662.
- Kim, J.-B., Li, Y., & Zhang, L. (2011a). CFOs versus CEOs: Equity incentives and crashes. Journal of Financial Economics, 101(3), 713-730.
- Kothari, S. P., Shu, S., & Wysocki, P. D. (2009). Do managers withhold bad news? Journal of Accounting Research, 47(1), 241-276.
- Lugovskaya, L. (2010). Predicting default of Russian SMEs on the basis of financial and non-financial variables. Journal of Financial Services Marketing, 14(4), 301-313.
- Merton, R. C. (1974). On the pricing of corporate debt: The risk structure of interest rates. The Journal of Finance, 29(2), 449-470.
- Mohamed, N., & Rashed, A. (2021). An investigation of the relationship between corporate social responsibility and corporate financial performance in Egypt: The mediating role of information asymmetry. Journal of Accounting, Business and Management (JABM), 28(1), 73-86.
- Murata, R., & Hamori, S. (2021). ESG disclosures and stock price crash risk. Journal of Risk and Financial Management, 14(2), 70.
- Nguyen, V. C., Nguyen, T. N., Le, T. T. O., & Nguyen, T. T. (2019). Determining the impact of financial performance factors on bankruptcy risk: an empirical study of listed real estate companies in Vietnam. Investment Management & Financial Innovations, 16(3), 307-318.
- Rashed, A., & Ghoniem, W. (2022). The impact of cash holding on stock returns in small and medium enterprises on the Egyptian Nile Stock Exchange. Investment Management and Financial Innovations, 19(3), 83-92.
- Rashed, A., Abd El-Rahman, E., Isamil, E., & Abd El-Samea, D. (2018). Ownership structure and investment efficiency: Evidence from Egypt. International Journal of Accounting and Financial Reporting, 8(4), 1-22.
- Shehata, W., & Rashed, A. (2021). Accounting Conservatism, Information Asymmetry and Cash Holdings. Journal of Accounting, Business and Management (JABM), 28(1), 63-72.
- Su, K., & Zhou, Z. (2022). Do corporate social responsibility reduce crash risk of stock price: evidence from China. Chinese Management Studies, 17(2), 251-273.
- Udin, S., Khan, M. A., & Javid, A. Y. (2017). The effects of ownership structure on likelihood of financial distress: an empirical evidence. Corporate Governance: The International Journal of Business in Society, 17(4), 589-612.
- Vassalou, M., & Xing, Y. (2004). Default risk in equity returns. The Journal of Finance, 59(2), 831-868.
- Wang, X., & Liu, H. (2022). The impact of rollover restriction on stock price crash risk. Pacific-Basin Finance Journal, 74, 101796.
- Zhu, W. (2016). Accruals and price crashes. Review of Accounting Studies, 21(2), 349-399.