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Individualism and stock price crash risk

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Abstract

Employing a sample of 26,473 firms across 42 countries from 1990 to 2013, we find that firms located in countries with higher individualism have higher stock price crash risk. Furthermore, individualism can be transmitted by foreign investors from overseas markets to influence local firms’ crash risk, and can exacerbate the impact of firm risk taking and earnings management on crash risk. Moreover, the positive relation between individualism and crash risk is amplified during the global financial crisis and attenuated by enhanced country-level financial information transparency and the adoption of International Financial Reporting Standards.

Résumé

Utilisant un échantillon de 26 473 entreprises dans 42 pays de 1990 à 2013, nous constatons que les entreprises situées dans des pays où l’individualisme est fort font face à un risque plus élevé d’effondrement des cours boursiers. Par ailleurs, l’individualisme peut être transmis par des investisseurs étrangers venant de marchés extérieurs pour influencer le risque de crash des entreprises locales, et il peut accentuer l’impact de la prise de risque et de la gestion des gains sur le risque de crash. En outre, la relation positive entre l’individualisme et le risque de crash s’est amplifiée au cours de la crise financière mondiale et elle s’est atténuée grâce à la transparence accrue des informations financières au niveau des pays et à l’adoption de normes internationales d’informations financières.

Resumen

Usando una muestra de 26.473 empresas en 42 países entre 1990 y 2013, encontramos que las empresas ubicadas en países con mayor individualismo tienen mayores riesgos descalabro bursátil. Además, el individualismo puede ser transmitido por inversionistas extranjeros de mercados extranjeros para influenciar el riesgo de descalabro de las empresas locales, y puede exacerbar el impacto de tomar riesgos por parte de las empresas y la gestión de las ganancias de riesgo de descalabro. Así mismo, la relación positiva entre individualismo y riesgo de descalabro se amplifica durante la crisis financiera global y es atenuada mediante el mejoramiento de la transparencia de la información financiera a nivel país y la adopción de Normas Internacionales de Información Financiera.

Resumo

Empregando uma amostra de 26.473 empresas em 42 países, de 1990 a 2013, descobrimos que as empresas localizadas em países com maior individualismo têm maior risco de quebra do preço das ações. Além disso, o individualismo pode ser transmitido por investidores estrangeiros de mercados externos para influenciar o risco de quebra das empresas locais, e pode exacerbar o impacto da exposição ao risco da empresa e do gerenciamento de resultados no risco de quebra. Além disso, a relação positiva entre o individualismo e o risco de quebra é amplificada durante a crise financeira global e atenuada pela maior transparência de informações financeiras em nível nacional e pela adoção das Normas Internacionais de Contabilidade.

摘要

使用1990年到2013年间在42个国家的26,473家公司的样本,我们发现位于较高个人主义的国家的公司具有较高的股价崩盘风险。另外,个人主义可以通过来自海外市场的外国投资者传播,以影响本地公司的崩盘风险,并可能加剧公司风险承担和盈利管理对崩盘风险的影响。而且,个人主义和崩盘风险之间的正相关的关系在全球金融危机期间得到放大,并随着国家级的财务信息透明度的提高和国际财务报告标准的采用而减弱。

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Acknowledgements

All authors have equal contributions to this article. We are grateful to Lemma Senbet (the editor), two anonymous reviewers, and an additional resource person for their insightful and constructive comments. For helpful suggestions, we thank Chen, John Goodell, Ambrus Kecskés, Dong Wook Lee, and Hongping Tan; conference participants at the 2016 AsianFA Annual Conference, the 2016 Young Finance Scholars’ Conference, the 2016 INFINITI Conference on International Finance, the 2017 FMA Asia/Pacific Conference, and the 2017 EFMA Annual Conference; and seminar participants at the universities of Edinburgh, Essex, Glasgow, Jinan, and Sun Yat-sen. Zhe An acknowledges the financial support from the New Academic Staff Support Grant of Monash University.

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Authors and Affiliations

  1. Monash Business School, Monash University, Melbourne, Australia

    Zhe An

  2. UNSW Business School, University of New South Wales, Sydney, Australia

    Zhian Chen

  3. Management School, Jinan University, 601 Huangpu Avenue West, Tianhe, Guangzhou, 510632, China

    Donghui Li

  4. Adam Smith Business School, University of Glasgow, Glasgow, UK

    Lu Xing

  5. Business School, University of Edinburgh, Edinburgh, UK

    Lu Xing

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  1. Zhe An
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Correspondence to Donghui Li.

Additional information

Supplementary information accompanies this article on the Journal of International Business Studies website (www.palgrave.com/journals).

Accepted by Lemma Senbet, Area Editor, 26 February 2018. This article has been with the authors for three revisions.

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Appendix: Variable Definitions and Data Sources

Appendix: Variable Definitions and Data Sources

Variable

Description

NCSKEW

The negative skewness of firm-specific weekly returns over a given year. Source: Datastream

DUVOL

The natural logarithm of the ratio of the standard deviation of down-week firm-specific weekly returns to the standard deviation of up-week firm-specific weekly returns over a given year. A firm-week is defined as a down (an up) week if the firm-specific weekly return is below (above) its annual mean. Source: Datastream

COUNT

The number of crash weeks minus the number of jump weeks over a given year. A firm-week is defined as a crash (jump) week if the firm-specific weekly return is 3.09 standard deviations below (above) its annual mean. Source: Datastream

IDV

The degree to which individuals focus on themselves and their immediate families over their societal groups. Source: Hofstede (2005)

SIGMA

The standard deviation of firm-specific weekly returns over a given year. Source: Datastream

ACCM

The three-year moving sum of the absolute value of discretionary accruals, where discretionary accruals are calculated based on the modified Jones model (Dechow et al., 1995). Source: Worldscope

RET

The mean of firm-specific weekly returns over a given year, multiplied by 100. Source: Datastream

DTURN

The difference between the average monthly stock turnover over the current year and that over the previous year, where monthly stock turnover is calculated as monthly trading volume scaled by the number of shares outstanding during the month. Source: Datastream

LEV

Total debt divided by total assets. Source: Worldscope

ROA

Earnings before interest and taxes divided by total assets. Source: Worldscope

MTB

The ratio of market value to book value of equity. Source: Worldscope

SIZE

The natural logarithm of the firm’s market capitalization (in constant 2005 US$). Source: Worldscope

GDP/CAPITA

The natural logarithm of the country’s GDP per capita (in constant 2005 US$). Source: World Development Indicators

GDP_GROWTH

The country’s annual GDP growth rate. Source: World Development Indicators

MCAP

The country’s stock market capitalization scaled by its GDP. Source: World Development Indicators

STKTURN

Total value of stocks traded divided by the country’s stock market capitalization. Source: World Development Indicators

CR

The country’s creditor rights index. Source: Djankov et al. (2007)

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An, Z., Chen, Z., Li, D. et al. Individualism and stock price crash risk. J Int Bus Stud 49, 1208–1236 (2018). https://doi.org/10.1057/s41267-018-0150-z

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