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Contemporary Accounting Research Vol. 41 No. 1 2024

Common institutional ownership and stock price crash risk

Shenglan Chen1; Hui Ma2; Qiang Wu3; Hao Zhang4

1 School of Economics and Institute for Industrial System Modernization Zhejiang University of Technology Zhejiang China · 2 Institute of Accounting and Finance Shanghai University of Finance and Economics Shanghai China · 3 School of Accounting and Finance Hong Kong Polytechnic University Hong Kong China · 4 Saunders College of Business Rochester Institute of Technology Rochester New York USA

open access

Abstract

This paper presents new evidence on the economic benefits arising from common institutional ownership. We find a negative and significant effect of common institutional ownership on stock price crash risk. This effect is robust to a battery of robustness checks and is causal according to some identification tests, including difference‐in‐differences analyses on financial institution mergers. We find evidence that the negative effect is attributable to the monitoring role of common institutional owners—a role that is enabled by common owners' lower information processing cost and greater monitoring incentives owing to governance externalities. We also find that common owners negatively influence crash risk through constraining bad news hoarding and that common owners are more likely to force CEO turnover when a firm has higher crash risk. Overall, our results suggest that common institutional shareholders play a unique and effective monitoring role that fends off stock price crashes.

DOI
10.1111/1911-3846.12915
Volume
41
Issue
1
Pages
679-711
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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