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What accounts for the effect of sustainability engagement on stock price crash risk during the COVID-19 pandemic—Agency theory or legitimacy theory?

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  • Zhang, Junru
  • Zheng, Chen
  • Shan, Yuan George

Abstract

In this study, we conduct a textual analysis of the third-party disclosure of corporate sustainability news focused on the Standard and Poor's 500 firms in the United States market during the first and second quarter of 2020. We find a positive relationship between corporate sustainability news release and firm-specific stock price crash risk. This finding is surprising, but it indeed aligns with agency theory. It indicates that the coronavirus disease (COVID-19) pandemic exacerbated the tendency of managers under increasing financial pressure to use the sustainability information release as a mechanism to mask and withhold bad news for extended periods at the expense of shareholders. This tendency results in high stock price crash risk. Our results are robust to alternative empirical specifications, estimation methods, and tests for endogeneity. Moreover, additional evidence reveals that agency theory dominates legitimacy theory in explaining the effect of sustainability on this risk during the COVID-19 pandemic.

Suggested Citation

  • Zhang, Junru & Zheng, Chen & Shan, Yuan George, 2024. "What accounts for the effect of sustainability engagement on stock price crash risk during the COVID-19 pandemic—Agency theory or legitimacy theory?," International Review of Financial Analysis, Elsevier, vol. 93(C).
    • Handle: RePEc:eee:finana:v:93:y:2024:i:c:s1057521924000991
    DOI: 10.1016/j.irfa.2024.103167
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    More about this item

    Keywords

    Sustainability engagement; COVID-19; Agency theory; Legitimacy theory; Stock price crash risk; Media coverage;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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