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Corporate Derivatives Usage, Information Environment, and Stock Price Crash Risk

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  • Jeong-Bon Kim
  • Yi Si
  • Chongwu Xia
  • Lei Zhang

Abstract

This study investigates the effect of corporate derivatives usage on stock price crash risk. We test two competing hypotheses. Under the transparency hypothesis, derivatives usage reduces information opacity and lowers crash risk. Under the speculation hypothesis, derivatives usage exacerbates managerial short-termism and increases crash risk. We find evidence supporting the transparency hypothesis. This result is robust to sensitivity checks including a two-stage treatment model, difference-in-differences test, and subsample analysis. We further show that curbing bad news hoarding, curtailing overinvestment, and increasing breadth of ownership are potential channels through which derivatives usage mitigates crash risk. Additional tests on the effect of derivatives usage on likelihood of securities class-action litigation provide consistent results.

Suggested Citation

  • Jeong-Bon Kim & Yi Si & Chongwu Xia & Lei Zhang, 2022. "Corporate Derivatives Usage, Information Environment, and Stock Price Crash Risk," European Accounting Review, Taylor & Francis Journals, vol. 31(5), pages 1263-1297, October.
    • Handle: RePEc:taf:euract:v:31:y:2022:i:5:p:1263-1297
    DOI: 10.1080/09638180.2021.1918564
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    Cited by:

    1. Eugster, Nicolas & Wang, Qingxia, 2023. "Large blockholders and stock price crash risk: An international study," Global Finance Journal, Elsevier, vol. 55(C).
    2. Qiankun Gu & Jeong‐Bon Kim & Ke Liao & Yi Si, 2023. "Decentralising for local information? Evidence from state‐owned listed firms in China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(5), pages 5245-5276, December.

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