Saturday, March 30, 2019
Director Network Influence on Stock Price Cash Risks
manager Network Influence on Stock Price property RisksIntroductionA sprouting issue in bodily establishment and the business world is the concept of decision maker meshing. Recent accounting and finance literature use social net profit theory to explain versatile merged behaviors and practices steaming from culture, resources exchange and relationship building. The correlation between decision maker network and earnings management (Omer et al, 2016 Chui, et al 2012), coach network and revenue management (Brown Drake, 2013), and director network and corporate investment decisions (Singh Schonlau, 2009), among other corporate practices admit been capaciously researched but crease wrong ram attempt has been miss in the ara of social networks.Firms possess congruent behavior patterns as a result of the instruction exchange among them. The observed herding behavior of firms sack up be explained by social network theory which predicts firms to imitate others od dly those perceived to possess superior information (Lieberman Asaba, 2006). Corporate executives have incentives to counterfeit the monetary deed by maintaining bad word (with the look at that much(prenominal) bad news show can be over false in the future) and accelerating the disclosure of darling news (as this signifies competency). As directors imitate distributively other, such behavior can easily diffuse among them. The effect of director networks on firms performance disclosures is multifaced. Prior director network literature catalogue that through and through information exchange, directors learn from their peers on how to collapse perform their monitor and advising intentions to maximize shareholder value (Chuluun et al., 2014 Larcker et al., 2013). Directors can enhance their monitoring expertness by linking up with other directors who are more experienced and committed to other experienced directors. Through the positive learning hypothesis, directors become better monitors of managers of their firms. My conjecture here is that directors can improve their individual expertise and readiness by obtaining more quality information from other directors.As a two-edged sword, director networks can also be a vehicle for the distribution of bad corporate practices. friendly interactions can act as dais through which information about undesirable corporate practices are exchanged. agree to Davis (1991), the diffusion of poison pills adopted among US firms in the late mid-eighties were engineered through the network directors built. Also, options expenditure and backdating were documented to relate to networked firms (Reppenhagen 2010, Bizjak et al., 2009). The propensity to double over bad act when those engaged in the act go scot-free after(prenominal) a long time (Marvin Shigeru, 2006). By the negative learning hypothesis, directors take up information about such bad corporate practices to their firms. This can subside agains t the monitory component part of directors hence adversely affect their performance. I break that directors take the final responsibility for variant corporate practices including financial business relationship transparency and disclosures.This proposed interpret seeks to employ social network and business unreal theory to examine pipeline hurt wad, which usually result from bundle bad news from the conduct market. Prior literature argue that managers hoard bad news either to achieve personalized goals such as higher compensation, job security and empire building or presumptuously to maximize long-term shareholders value (Ball, 2009 Kothari et al., 2009 Graham et al, 2005). Whatever the goal, whether to achieve personal agenda or to promote shareholder value, bad news hoarded and lay in for long result in investment company legal injury flop. (Hutton et al.,2009 Jin and Myers, 2006).Several papers, summarized below, have explored the federation between crash att empt of infection and various firm level characteristics. However, studies that directly investigate stock price risk through executive personal characteristics have concentrated mostly on managers personal attributes such as chief executive officer over office but the social expression within which the phenomenon is practiced has largely been ignored. My proposed call for seek to examine the verifiable link between the relationships directors build and the distribution of stock returns.My news report depart tally to the literature in several ways. First, to my knowledge, this go forth be the premiere study to examine the relation between director network and stock crash risk. By focusing on a unique perspective, this study result furnish new turn out concerning the economic consequences of social imitations. In particular, the findings result identify significant benefits that social interactions bring to firms and their shareholders. Xing, Zhang, and Zhao (2010) and Yan (2011) suggest that total outcomes in the blondness market are of fundamental concerns to shareholders and will anticipate interpretations. Thus, the empirical evidence will be useful for understanding the role that director network plays in influencing both corporate behavior and investor welfare. Second, this will extend the literature on corporate governance by video display the relation between social connectivity and stock price crash risk relative to the strength of corporate governance mechanisms in place in a firm. This will provide more explanation on the formulaic governance mechanisms in monitoring the flow of corporate information to the truth market. Third, this study will add to the research on bad news hoarding theory of stock price crash risk. In particular, the subtraction of social interactions for future crash risk will provide classic insights into the behavioral-sociological nature of managerial manipulation of information. Recent studies on crash risk suggest that managerial bad news hoarding activities can be explain via religion (Jeffrey L. Callen and Xiaohua Fang, 2015), corporate social responsibility (Yongtae Kim, 2014), CEOs over confidence (Jeong-Bon Kim, 2014), CFOs equity incentives (Jeong-Bon Kim, 2011) accounting conservatism (Kim et al, 2010), tax avoidance (Kim et al, 2010), and corporate financial opacity (Hutton et al, 2009). However, it is not clear what role executive social participations and/or social norms play in influencing the behavior to conceal bad news. My study will help to fill this gap in the literature by providing evidence on the relation between director network and crash risk and the consequential role that social connections play on managerial bad news hoarding activities. Last, but not the least, this study will provide investors with priceless information on how the social business surround affects firm behavior, which may help them to predict and eschew future stock price crash in their portfolio investment decisions.Research intent The objective of this study is to find out how stock price crash is exercise by the social set up directors build. Specific research questions areCan stock price crash risk be explained through director network?Does the level of stock price crash risk increase with the degree of executive connection?How much dissidence of stock price crash is attributable to director network?Research designThe variables for this study-director connectedness and stock price crash risk will be separately estimated using Riskmetrics, CRSP and COMPUSTAT data. The Riskmetrics will be used in computing the measures of directors network. entropy on the stock return for the calculating crash risk will be obtained from CRSP while compustat will provide the relevant company financials for my research. My adjudicate size will cover the period of 1990-2014. The result of the first stop estimation will be put into a cross-sectional regress model for further estimation of the relationship between firm networks and stock price crash risk. I will use UCINET/PAJEK to estimate various dimensions of director networks (Omer et al., 2014). Crash risk will be estimated using (Chen et al .2001), Jin and Myers (2006) and Hutton et al (2009) models which provides three measures of crash risk including i) the negative coefficient of skewness of firms specific daily returns, ii) the down-to-up volatility of firm-specific daily returns, and iii) the difference between the number of long time with negative extreme firm-specific daily returns and the number of days with positive extreme firm-specific daily returns.The primary model for the regression will beCrashRiskj =+1 DirectorNetworkj + 2Controlvariables + iWhere CrashRiskj and DirectorNetworkj refer to the various measurements of crash risks and director networks of firm J respectively.Literature review Former Chairman of the be on of General Motors arse G. Smale wrote in 1995 The board is re sponsible for the successful perpetuation of the corporation. That responsibility cannot be relegated to management. A board of directors is expected to play a key role in corporate governance. The board has responsibility for CEO selection and time providing feedback to management on the organizations strategy compensating senior executives monitoring financial health, performance and risk and ensuring accountability of the organization to its investors and authorities. The board thus play important role in corporate governance hence the need to study the board in broader perspective including their social networks. This is because through network, knowledge, ideas and corporate practices whether smashing or bad are shared between companies. Director network thus serves vehicle for the spread of behavior between related firms. (Asch 1951 Milgram 1963, Hirshleifer and Teoh (2003, 2009)Director networks Social network theory suggests that individuals behavior is the product of thei r social interactions and this connection extends to corporate behavior (Jackson, 2008 Newman, 2010). Individuals and their link up form a network crossways which they share ideas and resources, which influences their decision. Under opacity, observe behaviors of others, can provide useful insights (Marvin Shigeru, 2006). Social networks serve as channel for the transmission of information about corporate practices climaxing into herding behavior (Bikhchandani, Hirshleifer, Welch, 1998 Hirshleifer Hong Teoh, 2003). The link can either be direct such as shared directorates, trade partnership or indirect such as friend of friend of friend. Newman (2010) provides evidence on the relevance on the indirect link in the information sharing process. A director with many connections become an information hub making him very powerful in the chain of network. This is described as centrality in the network literature (Jackson, 2008). A direct link to an information hub increases access co de to more complete information. Also, connection to a direct link to the information hub can acquire many information, though the closer the better. This had led to four measurements of director network that is to say degree, eigenvector, betweenness and closeness centralities. Degree centrality is the absolute measure of individual social connections and blow of more information. The indirect connection where ideas exchange is from several other links is known as eigenvector centrality. Betweenness centrality relates to information control within the web. In a network, an individual positioned between two others serving as the medium of information exchange between them is viewed as one controlling information flow. The give-up the ghost dimension of network which relates to the proximity to information access to enhance optimization is the closeness centrality. Closeness centrality measures how quick information from other members of a network gets to an individual. The clos er an individual is to a source of information, the more efficient and easier it is to access information (Jackson, 2008 Newman, 2010). The kind of information received will be line of latitude to the actions of the individual. I therefore, hypothesize that, firms within the same network will have homogeneous behavior.Director networks and stock price crash risk monetary reports provide information about a firms economic performance. Accounting poetry are crucial for economic decisions of a firms stakeholders but their relevance can only be harness when provided at the right time. Corporate executives by nature exhibit some resistance in disclosing bad performances of their firms and this behavior catalyst to stock price crashes (Hutton et al., 2009 Jin and Myers, 2006). Managers have been reported to have hoard information to opportunistically influence contractual outcomes (Cheng, Man, Yi, 2013, Healy Wahlen, 1999 Verrecchia, 1983). Extant literature documents the motives f or information hoarding such as personal gain and career concern. (Kothari et al. 2009). In addition, Ball (2001, 2009) argues that nonfinancial motives, such as empire building and maintaining the esteem of ones peers, also provide powerful incentives for managers to conceal bad performance. Empirically, Kothari et al. (2009) find evidence concordant with the aspiration of managers to hoard bad news. The managerial tendency to withhold bad news leads to bad news being stockpiled within the firm. However, there is a veritable point at which it becomes too costly or impossible for managers to withhold the bad news (Kothari et al., 2009). When such a tipping point arrives, all the however hidden bad news will come out at once, resulting in a large negative price adjustment, that is, a crash (Hutton et al., 2009 Jin and Myers, 2006). Moreover, Bleck and Liu (2007) argue that the withholding of bad news prevents investors from discerning bad projects from heartfelt ones and, theref ore, from liquidating bad projects promptly. Thus, bad projects are kept alive and the resulting negative bills flows eventually materialize, triggering asset price crashes. Employing country- and firm-level designs, respectively, Jin and Myers (2006) and Hutton et al. (2009) provide empirical evidence consistent with the above mechanisms of stock price crashes. Several papers support the linkage of director network to various corporate behaviors such as expending stock option, (Reppenhagen 2010), private equity incentives (Stuart and Yim 2010) stock option backdating (Bizjak et al. 2009) and poison-pill adoption (Davis 1991). Others take director network and mutual fund performance (Cohen, Frazzini, and Malloy, 2008 Kuhnen, 2008), venture cap investments (Hochberg, Ljungqvist, and Lu, 2007), executive compensation (Barnea and Guedj, 2009), and firm governance (Fracassi and Tate, 2008 Hwang and Kim, 2008). They provide empirical evidence on the transfer of behavior between relat ed firms.Building on the literature on social network and the literature on crash risk, I propose that director network can affect firm-level stock price crash risk. Since director network can pass good or bad business practices, it can mitigate or contribute to crash risk, however, the quantum ultimately is an empirical question. The empirical analysis will throw up light on this important issue.ReferencesAshbaugh, Hollis, Joachim Gassen, and Ryan Lafond, 2005, Does Stock Price Synchronicity glisten Information or Noise? The International Evidence, mimeoBarnea, A., Guedj, I., 2009. Director networks. unpublished working paper. University of Texas, Austin.Brown, J. L., Drake, K. D. (2013). Network ties among low-tax firms. The Accounting ReviewChen, J., Hong, H., Stein, J., 2001. Forecasting crashes Trading volume, gone returns, and conditional skewness in stock prices. Journal of financial political economy Chiu, P.-C., Teoh, S. H., Tian, F. (2012). Board interlocks and earni ngs management contagion. The Accounting ReviewHutton, A.P., Marcus, A.J., Tehranian, H., 2009. Opaque financial reports, R2, and crash risk. Journal of Financial Economics Kim, J.B., Li, Y., Zhang, L., 2011b. CFO vs. CEO equity incentives and crashes. Journal of Financial EconomicsKim, J.B., Zhang, L., 2013. 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