The Effect of Risk Disclosure and its Types on Crash Stock Price Risk

Document Type : Research Paper

Authors

1 PhD student in Accounting, Esfahan University, Esfahan, Iran. z.tabatabaei@ase.ui.ac.ir

2 Associate Professor of Accounting, Esfahan University, Esfahan, Iran. a.hashemi@ase.ui.ac.ir

3 Assistant Professor of Economics, Esfahan University, Esfahan, Iran. h.amiri2@ase.ui.ir

Abstract

Journal of Accounting Advances, (2020) 12(1):
DOI: 10.22099/JAA.2021.38010.2046
 
 
 
 
 
Journal of Accounting Advances (JAA)
Journal homepage: www.jaa.shirazu.ac.ir/?lang=en
 
 
 
 
 
 
Effect of Risk Disclosure and its Types on Crash Stock Price Risk
Seyedeh Zahra Tabatabaei1, Seyed Abbas Hashemi2*, Hadi Amiri3                   
 
 
 
PhD student in Accounting, Esfahan University, Esfahan, Iran. z.tabatabaei@ase.ui.ac.ir
2. Associate Professor of Accounting, Esfahan University, Esfahan, Iran. a.hashemi@ase.ui.ac.ir
3. Assistant Professor of Economics, Esfahan University, Esfahan, Iran. h.amiri2@ase.ui.ir
 
 
 
 
 
 
 
ARTICLE INF
 
 
ABSTRACT
 
 
 
 
 
Received: 2020-08-09
Accepted: 2021-01-18
 
 
 
The act of hiding and accumulating the bad news within the company by management has led to the creation of massive negative information. The sudden outburst of this news to the market would cause a stock price crash. In this regard, information disclosure about the risks faced by the company can lead to transparency of information and thus reduce the stock price crash risk. The goal of this research is to survey the effect of disclosure of risk and its types on stock price crash risk. In this study, 548 company-years during the period from 2011 to 2019 have been selected using systematic deletion method and research hypotheses have been tested using regression based on panel data with fixed effects. The results indicate that the disclosure of total risk has a negative and significant effect on the stock price crash risk. types of risk disclosures including financial risk, non-financial operating risk and strategic non-financial risk have a negative and significant effect on stock price crash risk.
 
 
 
 
 
* Corresponding author:
 
Seyed Abbas Hashemi
 
Associate Professor of Accounting, Esfahan University, Esfahan, Iran.
Email: a.hashemi@ase.ui.ac.ir
 
 
 
 
 
1- Introduction
In order to protect the manager's interests, attempts are made to conceal negative news inside the company and not disclose it. The act of hiding the bad news and accumulating it within the company has led to the creation of a mass of negative information. The sudden outburst of such news to the market will cause a dramatic decrease in stock prices. In this regard, disclosure of information about the risks faced by the company can lead to transparency of information and thus reduce the stock price crash risk. The aim of this study is to investigate the effect of risk disclosure, including financial risk, non-financial operating risk and strategic non-financial risk on stock price crash risk.
 
2- Hypothesis
Based on what was stated in the theoretical foundations of the research, one of the factors affecting the stock price crash risk is the disclosure of various risks. If the disclosure of the risks to which the company is exposed has informational content, it is expected to reduce the stock price crash risk. Therefore, the research hypotheses were formulated as follows:
 H1: Disclosure of total risk by the company has a negative impact on the stock price crash risk.
H2: Disclosure of financial risk by the company has a negative impact on the stock price crash risk.
 H3: Disclosure of non-financial operating risk by the company has a negative impact on the stock price crash risk.
H4: Disclosure of strategic non-financial risk by the company has a negative impact on the stock price crash risk.
 
3- Methods
Since the results of this research can be used in the decisions of users of financial statements, the purpose of this research is categorized as an applicable one. Besides, in terms of nature, it is included in descriptive research groups. It is also based on real information about the financial statements of companies listed on the Tehran Stock Exchange, which can be generalized to the entire statistical community by inductive method. As the goal of this research is to analyze the effect of exposing different types of risk on stock price crash risk, so it is in the field of post-event studies. In this research, the achievement of results has been done by testing the available data, so the present study is considered in the group of positive research.
 
4- Results
The first hypothesis of the research based on the negative and significant effect of total risk disclosure on stock price crash risk was not rejected. The results of this hypothesis indicate that the higher the risk disclosure in financial reporting, the lower the stock price crash risk. The second hypothesis of the research based on the negative and significant effect of disclosure of financial risk on stock price crash risk was not rejected. The results of this hypothesis indicate that the higher the level of disclosure of financial risk in financial reporting, the lower the stock price crash risk. The third hypothesis of research based on the negative and significant effect of non-financial operational risk disclosure on stock price crash risk was not rejected. The results of this hypothesis show that as the amount of non-financial operational risk disclosure in financial reporting increases, the stock price crash risk will decrease. The fourth hypothesis of the research based on the negative and significant effect of disclosure of strategic non-financial risk on stock price crash risk was not rejected. The results of this hypothesis reveals that, as the level of disclosure of strategic non-financial risk in financial reporting increases, the stock price crash risk will decrease.
 
5- Conclusion
The results of this reserach suggest that the disclosure of risk and its types in the Report of Directors has information content. As a result of more timely disclosure of information about the good and bad news of the company and reducing the motivation of managers to accumulate bad news and publish this news to the market, the stock price crash risk is reduced. Also, among the types of risk disclosure, using both negative skewness of stock returns criteria and down-to-up volatility, disclosure of non-financial operational risk leads to a further reduction in the stock price crash risk.
 
 
 
 

Keywords

References

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History

  • Receive Date: 09 August 2020
  • Revise Date: 18 January 2021
  • Accept Date: 18 January 2021

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