Stock Price Synchronicity, Crash Risk, and Institutional Investors

Posted: 20 Dec 2012

See all articles by Heng An

Heng An

University of North Carolina (UNC) at Greensboro - Department of Accounting and Finance

Ting Zhang

University of Dayton - School of Business Administration

Date Written: December 19, 2011

Abstract

Both stock price synchronicity and crash risk are negatively related to the firm’s ownership by dedicated institutional investors, which have strong incentive to monitor due to their large stake holdings and long investment horizons. In contrast, the relations become positive for transient institutional investors as they tend to trade rather than monitor. These findings suggest that institutional monitoring limits managers’ extraction of the firm’s cash flows, which reduces the firm-specific risk absorbed by managers, thereby leading to a lower R2. Moreover, institutional monitoring mitigates managerial bad-news hoarding, which results in a stock price crash when the accumulated bad news is finally released.

Keywords: agency problem, institutional monitoring, crash risk, stock price synchronicity

JEL Classification: G2, G3

Suggested Citation

An, Heng and Zhang, Ting, Stock Price Synchronicity, Crash Risk, and Institutional Investors (December 19, 2011). Available at SSRN: https://ssrn.com/abstract=2191799

Heng An (Contact Author)

University of North Carolina (UNC) at Greensboro - Department of Accounting and Finance ( email )

Bryan School of Business and Economics
Greensboro, NC 27412
United States

Ting Zhang

University of Dayton - School of Business Administration ( email )

300 College Park
Dayton, OH 45469
United States

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