Capital Structure
Sarah Mohsin; Narges Hamidian; Seyed Abbas Hashemi
Abstract
Stock price crash risk, defined as an adverse event, is a pervasive phenomenon at the market level. This implies that theStock price crash risk, defined as an adverse event, is a pervasive phenomenon at the market level. This implies that the decline in stock prices is not limited to a specific stock ...
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Stock price crash risk, defined as an adverse event, is a pervasive phenomenon at the market level. This implies that theStock price crash risk, defined as an adverse event, is a pervasive phenomenon at the market level. This implies that the decline in stock prices is not limited to a specific stock but extends across the entire market. Stock price crashes result in significant losses for shareholders and investors, as well as a decline in the overall capital market. Hence, understanding the factors influencing this phenomenon is of critical importance. The present study aims to investigate the impact of industry operating cash flow volatility on future stock price crash risk, considering the roles of economic policy uncertainty and conditional conservatism in companies listed on the Tehran Stock Exchange. A sample of 136 companies was selected using a screening method over the period from 2012 to 2022. To analyze the data and test the hypotheses, regression analysis and panel data techniques were employed. The findings indicate that industry operating cash flow volatility has a positive and significant effect on future stock price crash risk. Furthermore, economic policy uncertainty amplifies the positive effect of industry operating cash flow volatility on stock price crash risk. Conversely, conditional conservatism in accounting mitigates the positive relationship between operating cash flow volatility and future stock price crash risk. IntroductionThe expansion of the capital market is a cornerstone of economic growth and development for any country. A critical driver in advancing this sector is fostering active investor participation. To this end, ensuring transparency and providing access to relevant information for evaluating optimal investment opportunities, while considering the risk-return profile of various stocks, are essential for capital market participants. Among the risks faced by the capital market, stock price crash risk stands out as a significant concern. This risk, defined as a sharp and widespread decline in stock prices across the market, transcends individual stocks and affects the market as a whole. The implications of such crashes are profound, leading to substantial losses for shareholders and investors and potentially undermining the overall stability of the capital market. Consequently, identifying and understanding the factors that contribute to this phenomenon is of paramount importance. This study seeks to examine the effect of industry operating cash flow volatility on the future risk of stock price crashes. Furthermore, it incorporates the moderating roles of economic policy uncertainty and conditional conservatism in companies listed on the Tehran Stock Exchange. Literature ReviewThe existing literature suggests that stock price crashes result from efforts to conceal negative information within companies. This conclusion is based on the principal-agent theory by Jine and Myers (2006), which posits that management, having control over the flow of information, is motivated to withhold information, often negative, for various reasons over the long term.One of the factors contributing to stock price crash risk is the volatility of operating cash flows (Wang et al., 2022). Stable operating cash flows are a critical component of a company’s healthy and sustainable operations (Sun and Ding, 2020). Companies experiencing high volatility in operating cash flows typically have fewer cash reserves available for operational needs and are more reliant on external financing. For such companies, financing costs are higher, which, in turn, reduces their overall value (Chen and Huberman, 2014). It is essential to consider that external factors, such as macroeconomic and industry-specific conditions, significantly influence corporate decision-making. Management tends to believe that an increase in industry-level operating cash flow volatility exposes the company to a more uncertain external environment. As this volatility rises, capital market participants pay closer attention to the market, leading to a greater impact of negative information disclosures on the company’s future operations and financing decisions. Consequently, management becomes more inclined to conceal negative information, thereby increasing the risk of future stock price crashes.Moreover, heightened economic policy uncertainty exacerbates corporate policy risks, further incentivizing management to hide adverse news and information, which, in turn, increases the risk of stock price crashes (Luo & Zhang, 2020). Additionally, conditional conservatism practices counteract managerial tendencies and motivations to conceal negative information, thereby reducing the likelihood of stock price crashes and mitigating investment risks in equities (Kim & Zhang, 2016). Conditional conservatism is expected to prevent the accumulation of bad news within the company, thus reducing the sudden release of substantial negative information into the market (Pourheidari et al., 2018). Consequently, higher levels of conditional conservatism are associated with a lower accumulation and concealment of bad news, ultimately reducing the risk of stock price crashes (Antonakakis et al., 2013). Based on the above, the research hypotheses are as follows:Hypothesis 1: Industry operating cash flow volatility has a positive effect on future stock price crash risk.Hypothesis 2: Economic policy uncertainty exacerbates the positive effect of industry operating cash flow volatility on future stock price crash risk.Hypothesis 3: Conditional conservatism in accounting weakens the positive effect of industry operating cash flow volatility on future stock price crash risk. MethodologyThis study is categorized as applied research, as it aims to provide practical insights and solutions that can be directly implemented in real-world contexts. Methodologically, it adopts a descriptive-correlational approach, seeking to describe the characteristics of the variables under investigation and analyze the relationships among them. To achieve the research objectives, three hypotheses were formulated. These hypotheses examine the effects of industry operating cash flows volatility on future stock price crash risk, incorporating the moderating roles of economic policy uncertainty and conditional conservatism. The statistical sample consists of 136 companies listed on the Tehran Stock Exchange, observed over a ten-year period from 2012 to 2022. To analyze the data and test the hypotheses, regression analysis, panel data techniques, and Stata 15 software were utilized. ResultsThe analysis of the first hypothesis demonstrates that industry operating cash flow volatility exerts a positive and significant effect on future stock price crash risk. This finding underscores the destabilizing influence of variability in cash flows from core business operations, which can signal underlying financial instability and heighten the likelihood of abrupt and severe declines in stock prices. The results of the second hypothesis indicate that economic policy uncertainty intensifies the positive relationship between industry operating cash flow volatility and future stock price crash risk. This suggests that in an environment characterized by heightened economic policy uncertainty, the risks associated with cash flow variability are magnified. Unpredictable policy conditions can create additional pressure on management to obscure negative information in an effort to sustain investor confidence, further exacerbating the risk of stock price crashes. Finally, the findings related to the third hypothesis reveal that conditional conservatism in accounting mitigates the positive effect of industry operating cash flow volatility on future stock price crash risk. Conditional conservatism, characterized by the timely recognition of potential losses and liabilities over gains, serves as a counterbalance to managerial tendencies to suppress unfavorable information. By enforcing stringent accounting standards, conditional conservatism enhances the transparency and reliability of financial reporting, thereby attenuating the impact of cash flow volatility on crash risk and fostering greater stability in the capital market. ConclusionThis study examines the effect of industry operating cash flow volatility on future stock price crash risk, with a focus on the moderating roles of economic policy uncertainty and conditional conservatism in companies listed on the Tehran Stock Exchange. The findings of the first hypothesis reveal that volatility in operating cash flows signals potential risks related to a company’s future operations, investments, and financial activities. Moreover, such volatility may incentivize management to withhold adverse information, thereby increasing the likelihood of future stock price crashes. The results of the second hypothesis suggest that elevated economic policy uncertainty intensifies the risks associated with firm policies, further motivating management to conceal unfavorable information. This heightened opacity exacerbates the probability of stock price crashes, reflecting the amplified impact of cash flow volatility under uncertain policy environments. In contrast, the findings of the third hypothesis indicate that conditional conservatism in accounting practices mitigates the positive relationship between operating cash flow volatility and future stock price crash risk. By emphasizing the timely recognition of losses and liabilities over gains, conditional conservatism acts as a counterbalance to managerial tendencies to suppress negative information, thereby reducing the impact of operating cash flow volatility on crash risk. These findings align with prior research by Wang et al. (2022), Lu Zhang (2020), and Kim and Zhang (2016), further validating the theoretical and empirical linkages among operating cash flow volatility, policy uncertainty, and conditional conservatism in mitigating stock price crash risk.
