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From low resource slack to inflexibility: The share price effect of operational efficiency

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  • Yousefi, Hamed
  • Yung, Kenneth
  • Najand, Mohammad

Abstract

This study examines the relationship between operational efficiency (OE) and stock price crash risk (SPCR). While high OE is arguably associated with better firm performance, it also increases vulnerability to disruptions and exposure to SPCR. Using a sample of US firms from 1997 to 2018, the study finds a positive relationship between OE and SPCR; additional results suggest that firm cash flow volatility serves as the channel through which this relationship is mediated. The study also finds evidence that high-OE firms tend to suppress bad news from investors, which exposes them to SPCR. Furthermore, the study shows that the positive relationship between OE and SPCR beyond the optimal level hurts firm value, highlighting the importance of balancing efficiency improvement efforts with business risk management. The results of this study have implications for managers and owners seeking to mitigate tail risk in firm investment decisions, and underscore the importance of maintaining business flexibility in the pursuit of efficiency.

Suggested Citation

  • Yousefi, Hamed & Yung, Kenneth & Najand, Mohammad, 2023. "From low resource slack to inflexibility: The share price effect of operational efficiency," International Review of Financial Analysis, Elsevier, vol. 90(C).
    • Handle: RePEc:eee:finana:v:90:y:2023:i:c:s105752192300443x
    DOI: 10.1016/j.irfa.2023.102927
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    2. Ren, Xiaohang & Fu, Chenjia & Jin, Chenglu & Li, Yuyi, 2024. "Dynamic causality between global supply chain pressures and China's resource industries: A time-varying Granger analysis," International Review of Financial Analysis, Elsevier, vol. 95(PA).

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    More about this item

    Keywords

    Operational efficiency; Operational slack; Operational flexibility; Disruption; Stock price crash risk; Supply chain disruption; Cash flow volatility; Bad new hoarding; Firm value; Tail risk; Risk management; Investment decisions;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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