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Corporate Governance and Stock Price Crash Risk: Insights from an Emerging Market

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Abstract

This study provides empirical evidence of the multifaceted impact of corporate governance on stock price crash risk within the distinctive corporate governance landscape of the Pakistan Stock Exchange. Utilizing data from all non-financial firms listed on the Pakistan Stock Exchange, the study employs a robust methodology to control for potential endogeneity and reverse causality issues commonly encountered in corporate governance research. The findings reveal a dominance of family firms in the Pakistani market, holding majority control over boards and decision-making processes. Contrary to expectations, these corporate boards and family ownership structures do not contribute to the reduction of crash risk. However, the presence of block ownership indicates that institutional investors are predominantly short-term participants. In alignment with previous research, institutional investors in this context tend to play a passive and negative role in monitoring firms. Rather than applying monitoring pressure, they exhibit a tendency to exit, further contributing to price reductions and subsequent crashes. These insights underscore the necessity for market regulators to develop a corporate governance framework that not only ensures investor protection but also encourages firms to diminish information asymmetry through improved disclosure and transparency practices.

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Funding

This work was supported by the Humanities and Social Sciences Foundation, Ministry of Education of the People’s Republic of China [grant number 22YJC630179], the National Nature Science Foundation of China (71834003); and the Major Project of Philosophy and Social Science Research in Colleges and Universities of Jiangsu Province (2021SJZDA026).

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  1. College of Economics and Management, Nanjing University of Aeronautics and Astronauts, Nanjing, People’s Republic of China

    Muhammad Shahid Rasheed & Zhang Ling

  2. Malik Firoz Khan Noon Business School, University of Sargodha, Sargodha, Pakistan

    Muhammad Shahid Rasheed

  3. Department of Economics, COMSATS University Islamabad, Islamabad, Pakistan

    Shahzad Kouser

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  1. Muhammad Shahid Rasheed
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Correspondence to Muhammad Shahid Rasheed.

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Rasheed, M.S., Kouser, S. & Ling, Z. Corporate Governance and Stock Price Crash Risk: Insights from an Emerging Market. Asia-Pac Financ Markets (2024). https://doi.org/10.1007/s10690-024-09467-6

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