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Managerial overconfidence, firm transparency, and stock price crash risk: Evidence from an emerging market

Quanxi Liang (School of Business, Guangxi University, Nanning, China)
Leng Ling (Bunting College of Business, Georgia College and State University, Milledgeville, Georgia, USA)
Jingjing Tang (School of Business, Guangxi University, Nanning, China)
Haijian Zeng (Guangxi University, Nanning, China)
Mingming Zhuang (Guangdong University of Foreign Studies, Guangzhou, China)

China Finance Review International

ISSN: 2044-1398

Article publication date: 15 November 2019

Issue publication date: 18 June 2020

998

Abstract

Purpose

The purpose of this paper is to empirically analyze whether and how managerial overconfidence affects stock price crash risk.

Design/methodology/approach

Based on a large sample of Chinese non-state-owned firms from 2000 to 2012, this study employs methods including multiple linear regression model, Heckman two-stage treatment effect procedure, firm fixed effects model and event study to clarify the causality relationship between managerial overconfidence and crash risk.

Findings

The authors find that firms with overconfident managers (chief executive officer or board chairs) are more likely to experience future stock price crashes than firms with non-overconfident managers. The effect of overconfidence on crash risk is more pronounced for firms with low transparency, suggesting that firm opacity facilitates overconfident managers’ bad news hoarding activities, which, in turn, increases stock price crash risk. The authors also show evidence that overconfident managers tend to disclose good news in a timely manner.

Originality/value

The authors add to the growing literature on stock price crash risk. Specifically, the authors find that the cognitive bias of board chair plays an important role in the bad news hoarding activities, thereby increasing the likelihood of stock price crash. This study also contributes to the literature that addresses the effects of managerial overconfidence on corporate finance issues.

Keywords

Acknowledgements

Liang would like to thank the financial support from the National Natural Science Foundation of China (Grant Nos. 71362013 and 71762005). Tang would like to thank the financial support from the National Natural Science Foundation of China (Grant No. 71764001).

Citation

Liang, Q., Ling, L., Tang, J., Zeng, H. and Zhuang, M. (2020), "Managerial overconfidence, firm transparency, and stock price crash risk: Evidence from an emerging market", China Finance Review International, Vol. 10 No. 3, pp. 271-296. https://doi.org/10.1108/CFRI-01-2019-0007

Publisher

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Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited

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