Investigating the effect of institutional ownership on the relationship between the maturity of short-term debt and the risk of future stock price crash

Document Type : Research Paper

Authors

1 Assistant Professor, Department of Accounting, Shahid Bahonar University of Kerman, Kerman, Iran

2 Master of Accounting, Semnan University, Semnan, Iran

3 Master of Accounting, Mazandaran University, Babolsar, Iran

Abstract

 The purpose of the present study is to investigate the effect of institutional ownership on the relationship between debt maturity (short-term maturity) and the risk of future stock price crash in listed companies in Tehran Stock Exchange. In this regard, 167 companies were selected from among the listed companies in Tehran Stock Exchange during 2009-2018. Multivariate regression model and combined data were used to test the research hypothesis. Findings showed that short-term debt (one year or less) had a significant negative effect on the risk of future stock price crash and decreases the risk of future stock price crash by increasing the amount of debt. The risk of future stock price crash becomes more pronounced when companies have weaker institutional ownership, indicating that the short-term debt regulatory effect is a substitute for weak corporate governance mechanisms; in other words, the existence of short-term creditors cannot be due to lack of Compensate institutional circuits.
1- Introduction
One of the factors that leads to a crash in stock prices is the actions of managers to keep bad news and negative performance inside the company. Due date for debt is one of the factors that can prevent managers' opportunistic behaviors. The maturity of the debt will cause the creditors to renew their debt contract, asking for more information about the company's situation, which prevents the accumulation of bad news by the executives and ultimately prevents a sharp decline in stock prices (Foroughi and Sakyani, 2016).
The presence of institutional investors in the composition of shareholders as one of the external mechanisms affecting corporate governance has been globalized over the past years in terms of increasing importance. These shareholders have the incentives to control and change the performance of managers, and their active oversight can limit managers' behavior, And opportunistic actions of managers by reducing the information asymmetry between them and shareholders, and preventing the management of profits and accumulation of news, thereby reducing the risk of crashing stock prices (Vawadi Noqabi and Rostami, 2014).
Therefore, the purpose of this study is to investigate the relationship between short-term debt maturity and risk of future stock price crash, and the second step is to investigate the impact of institutional ownership on this relationship.
 
2-Hypotheses
H1: The maturity of short-term debt reduces the risk of future stock crash.
H2: The effect of short-term debt maturity on risk reduction is a further crash in stock prices in companies with lower institutional ownership.
 
3- Methods
The overall research method is that at first, the statistical society of the surveyed companies that have been accepted in the Tehran Stock Exchange has been investigated from the beginning of 2006 to the end of 2015 in the stock exchange. Then, the companies that did not have the characteristics for this research were eliminated, and finally 154 companies were selected as research samples. Subsequently, the research variables were extracted from the software and financial statements of the­ remaining companies, and finally the research hypotheses were tested.
 
4- Results
The first hypothesis was supported suggesting that the maturity of short-term debt reduces the risk of future stock crash.
The first hypothesis [The second hypothesis???] was supported suggesting that effect of short-term debt maturity on risk reduction is a further crash in stock prices in companies with lower institutional ownership.
 
5- Conclusion
The results of the first hypothesis test showed that the maturity of the debt had a negative effect on the risk of future stock price collapse. That means that if a shorter company's debt matures, the risk of a fall in stock prices decreases as well. One of the factors that can hinder the opportunistic behavior of managers is debt. The maturity structure of the debt affects the investment decisions of the company and the investor in the main. Due to incomplete debt contracts, the creditors may not be able to exercise control over any future event in accordance with the financial terms of the contract. But with respect to the right to control short-term debt, creditors can more effectively control borrowers (companies) and obtain more reliable information about the company's performance before repaying credit. This situation prevents the accumulation of bad news by managers and ultimately prevents a sharp decline in stock prices.
The results of the second hypothesis test showed that short-term debts play a controlling role on the opportunistic behavior of managers in order to hide bad news. Short-term lenders, in particular, can protect their rights through the need for managers to provide timely and reliable information about the company's financial condition or future investments when negotiating with borrowers. This distinctive feature of short-term debts improves disclosure of managerial information, the likelihood of accumulation of bad news, and therefore reduces the risk of falling stock prices.
 

 

Keywords

References

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History

  • Receive Date: 05 May 2018
  • Revise Date: 21 July 2019
  • Accept Date: 21 July 2019

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