The Effect of Stock Price Crash Risk on the Cost of Capital with the Mediating Role of Shareholders’ Ownership

Document Type : Case Study

Authors

Department of Accounting, Naser Khosrow Higher Education Institute of Saveh, Saveh, Iran

Abstract

Stock prices face several negative and sudden adjustments and managers postpone disclosing the negative/bad news for a long term. A consequence of stock price cash risk may be on the cost of capital which is funds’ cost for a company, or from an investor's perspective, it is the necessary rate of return on the current securities portfolio of a company. This criterion is employed to assess new projects of a company, as well. Accordingly, an issue which has not been significantly addressed in the research about the relationship between stock price cash risk and cost of capital is the mediating role of large shareholders’ ownership, while shareholders essentially own the company and reap the benefits or losses of the firm’s success or failure. Hence, the objective of this research is to investigate the effect of stock price crash risk on the cost of capital with the mediating role of the large shareholders’ ownership. For this purpose, we considered the listed firms in the Tehran Stock Exchange as our case study. Noticeably, the research time scope is 2012-2019. The method of this research is applied and its nature and content are correlational. Both deductive and inductive reasoning frameworks were used to undertake the study and the hypotheses were analyzed by panel analysis approach. The results showed that the stock price crash risk has a positive and significant effect on the cost of capital, however, the large shareholders’ ownership reduces the effect of stock price crash risk on the cost of capital.

Keywords

Main Subjects


COPYRIGHTS

©2021 The author(s). This is an open access article distributed under the terms of the Creative Commons Attribution (CC BY 4.0), which permits unrestricted use, distribution, and reproduction in any medium, as long as the original authors and source are cited. No permission is required from the authors or the publishers.

Badri, A., & Ghahramani, M. A. (2012). Profit smoothness and cost of property rights: evidence from Tehran Stock Exchange. Experimental Accounting Studies, 9(35), 23-47.
Chen, J., Hong, H., & Stein, J. C. (2006). Forecasting crashes: trading volume, past returns, and conditional skewness in stock prices. Journal of financial Economics, 61(3), 345-381.
Dastgir, M., Sakiani A., & N., S. (2019). The effect of financial constraints on stock price crash risk by considering the effect of accruals. Journal of Accounting Knowledge, 10(1), 67-90.
Ding, H., Lyu, C., & Chen, Y. (2018). Investor information sophistication: differences of opinion and the risk of a stock price crash: evidence from the social media “SSE E-Interaction”. Management World, 9, 161-171.
Foroughi, D., & Moazzeni, N. (2016). The Effect of Excessive confident of Management on Company Value. Financial Accounting Knowledge, 4(4), 65-84.
Hutton, A., Marcus, A., & Tehranian, H. (2009). Opaque Financial Report, R2, and Crash Risk. Journal of financial Economics, 94, 67-87.DOI:10.1016/j.jfineco.2008.1010.1003.
Jebran, K., Chen, S., & Zhang, R. (2019). Board diversity and stock price crash risk. Research in International Business and Finance, DOI:10.1016/j.ribaf.2019.101122.
Kim, J.-B., Li, Y., & Zhang, L. (2011). Corporate tax avoidance and stock price crash risk: Firm-level analysis. Journal of financial Economics, 100, 639-662.
Liu, K., & Ren, M. (2019). Stock price crash risk and cost of equity capital. IOP Conference Series: Earth and Environmental Science, 332(022017), DOI:10.1088/1755-1315/1332/1082/022017.
Nekrasov, A., & Shroff, P. (2009). Fundamentals-based risk measurement in valuation. The Accounting Review, 84(6), 1983.
Ni, X., & Yin, D. (2019). Institutional Common Ownership and Cost of Capital. SSRN Electronic Journal, DOI:10.2139/ssrn.3402919.
Ohlson, J., & Juettner-Nauroth, B. (2005). Expected EPS and EPS growth as determinants of value. Review of Accounting Studies, 10, 349-365.
Park, S. Y., & Jung, H. (2017). The Effect of Managerial Ability on Future Stock Price Crash Risk: Evidence from Korea. Sustainability, MDPI, 9(12), 1-17.
Rezaei, F., & Mohammadpour, M. (2018). Explaining the relationship between corporate social responsibility and their effect implicit cost of capital. New Research in Accounting and Auditing, 7(1), 117-138.
Romer, D. (1993). Rational asset-price movements without news [J]. American economic review, 83, 1112-1130.
Salehi, M., Beyrami, L., & Hoshyar, R. (2017). The effective factors on the cost of capital with emphasis on the auditing quality in the listed firms on Tehran Stock. Journal of Fiscal and Economic Policies, 4(1), 135-158.
Yaneg, Y. (2018). Theoretical Foundations of Corporate Social Responsibility and Research Paradigms in Professional Accounting. Management accounting, 7(22), 109-133.
Zhou, L., & Huang, J. (2019). Investor trading behaviour and stock price crash risk. Int. J. Financ. Econ, 24, 227-240.