Abstract:
Using a sample of A-share listed firms in China for the period 2004-2013, this paper investigates the relationship between corporate over-investment and stock price crash risk from the perspective of agency theory and managerial overconfidence. Our results show that, first, firms with more over-investment behavior face higher future stock price crash risk. Second, we find that the positive relation between over-investment and crash risk is attenuated when firms have lower agency cost, but CEO overconfidence has no impact on this relationship. This indicates that the manager’s bad news hoarding behavior due to conflict of interest between manager and shareholders, rather than managerial overconfidence, is the main driver for the above result. A further study shows that the predictive ability of over-investment for future crash risk is robust to longer measurement window of crash risk. However, corporate over-investment cannot predict future stock price positive jumps risk. Our paper not only contributes to the literature on stock price crash risk and corporate over-investment, but also has important practical implications for the development of capital market in China.
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