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Can a firm's hierarchical complexity affect its stock price behavior? Evidence from stock price crash risk

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  • Hoàng Long Phan
  • Ralf Zurbruegg

Abstract

Purpose - This paper examines how a firm's hierarchical complexity, which is determined by the way it organizes its subsidiaries across the hierarchical levels, can impact its stock price crash risk. Design/methodology/approach - The authors employ a measure of hierarchical complexity that captures the depth and breadth of how subsidiaries are organized within a firm. This measure is calculated using information about firms' subsidiaries extracted from the Bureau van Dijk (BvD) database that allows the authors to construct each firm's hierarchical structure. The data sample includes 2,461 USA firms for the period from 2012 to 2017 (11,006 firm-year observations). Univariate tests and panel regression are used for the main analysis. Two-stage-least-squares (2SLS) instrumental variable regression and various other tests are employed for robustness check. Findings - The results show a positive relationship between hierarchical complexity and stock price crash risk. This relationship is amplified in firms with a greater number of subsidiaries that are hierarchically distanced from the parent company as well as in firms with a greater number of foreign subsidiaries in countries with weaker rule of law. Originality/value - This paper is the first to investigate the impact hierarchical complexity has on crash risk. The results highlight the role that a firm's organizational structure can have on asset pricing behavior.

Suggested Citation

  • Hoàng Long Phan & Ralf Zurbruegg, 2023. "Can a firm's hierarchical complexity affect its stock price behavior? Evidence from stock price crash risk," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 20(3), pages 692-721, September.
    • Handle: RePEc:eme:ijmfpp:ijmf-06-2023-0299
    DOI: 10.1108/IJMF-06-2023-0299
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    More about this item

    Keywords

    Organizational structure; Hierarchical complexity; Stock price crash risk; G12; G14; G34;
    All these keywords.

    JEL classification:

    • 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
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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