Stock price synchronicity, crash risk, and institutional investors

Both stock price synchronicity and crash risk are negatively related to the firm's ownership by dedicated institutional investors, which have strong incentive to monitor due to their large stake holdings and long investment horizons. In contrast, the relations become positive for transient inst...

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Bibliographic Details
Published in:Journal of corporate finance (Amsterdam, Netherlands) Vol. 21; pp. 1 - 15
Main Authors: An, Heng, Zhang, Ting
Format: Journal Article
Language:English
Published: Amsterdam Elsevier B.V 01.06.2013
Elsevier
Elsevier Science Ltd
Subjects:
Agency problem
Cash flow
Crash risk
Institutional investments
Institutional monitoring
Investment policy
Risk management
Stock price synchronicity
Stock prices
Studies
Agency problem
Crash risk
G2
G3
Institutional monitoring
Stock price synchronicity
ISSN:0929-1199, 1872-6313
Online Access:Get full text
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Summary:Both stock price synchronicity and crash risk are negatively related to the firm's ownership by dedicated institutional investors, which have strong incentive to monitor due to their large stake holdings and long investment horizons. In contrast, the relations become positive for transient institutional investors as they tend to trade rather than monitor. These findings suggest that institutional monitoring limits managers' extraction of the firm's cash flows, which reduces the firm-specific risk absorbed by managers, thereby leading to a lower R2. Moreover, institutional monitoring mitigates managerial bad-news hoarding, which results in a stock price crash when the accumulated bad news is finally released. ► Dedicated institutional investors decrease stock price synchronicity. ► Transient institutional investors increase stock price synchronicity. ► Dedicated institutional investors decrease stock crash risk. ► Transient institutional investors increase stock crash risk. ► Results are consistent with the Jin and Myers (2006) model.
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ISSN:0929-1199
1872-6313
DOI:10.1016/j.jcorpfin.2013.01.001