Multinational Corporations and Stock Price Crash Risk
A nascent literature in finance and accounting on tail risk in individual stock returns concludes that bad news hoarding by corporate managers engenders sudden, extreme crashes in a firm’s stock price when the bad news is eventually made public. This literature finds that firm-specific crash risk is higher among firms with more severe asymmetric information and agency problems. A hitherto disjointed literature spanning the fields of international business, finance, and accounting suggests that geographic dispersion in a firm’s operations, and especially dispersion across different countries, gives rise to organizational complexities and greater costs of monitoring that can exacerbate asymmetric information and agency problems. Motivated by the confluence of arguments and findings from these two strands of literature, this paper examines whether stock price crash risk is higher among multinational firms than domestic firms. Using a large sample of U.S. headquartered firms during 1987-2011, we find robust evidence that multinational firms are significantly more likely to crash than domestic firms. Moreover, we show that the difference in crash risk between multinational and domestic firms is most acute among firms with weaker corporate governance mechanisms, including weaker shareholder rights, less independent boards, and less stable institutional ownership. Our analysis indicates that stronger monitoring from each of these three governance mechanisms significantly attenuates the positive relation between crash risk and multinationality. Our findings are robust to the use of alternative measures of crash risk and to controlling for known determinants of crash risk identified in prior studies. Our study offers new insights that should hold value for scholars and market participants interested in understanding the implications of heighted agency problems that multinational firms are likely to encounter and scholars and market participants interested in developing models that more accurately predict tail risk in the equity returns of individual firms.
An, H. and Zhang, T. (2013). Stock price synchronicity, crash risk, and institutional investors. Journal of Corporate Finance 21, 1-15. DOI: 10.1016/j.jcorpfin.2013.01.001.
Ashbaugh, H. and Pincus, M. (2001). Domestic Accounting Standards, International Accounting Standards, and the Predictability of Earnings. Journal of Accounting Research 39, 417- 434. DOI: 10.1111/1475-679X.00020.
Bakshi G., Cao, C. and Chen Z. (1997). Empirical performance of alternative option pricing models. Journal of Finance 52, (2003)–2049. DOI: 10.1111/j.1540-6261.1997.tb02749.x.
Ball, R. (2009). Market and Political/Regulatory Perspectives on the Recent Accounting Scandals. Journal of Accounting Research 47, 277–323. DOI: 10.1111/j.1475-679X.2009.00325.x.
Barberis, N. and Huang, M., (2008). Stocks as Lotteries: The Implications of Probability Weighting for Security Prices. American Economic Review 98, 2066–2100. DOI: 10.1257/aer.98.5.2066.
Beasley, M. (1996). An Empirical Analysis of the Relation between the Board of Director Composition and Financial Statement Fraud. Accounting Review 71, 443–465.
Bebchuk, L.A., Cohen, A., and Ferrell, A. (2009). What Matters in Corporate Governance? Review of Financial Studies 22, 783-827. DOI: 10.1093/rfs/hhn099.
Black, D.E., Dikolli, S.S., and Dyreng, S.D. (2014). CEO Pay-for-Complexity and the Risk of Managerial Diversion from Multinational Diversification. Contemporary Accounting Research 31, 103-135. DOI: 10.1111/1911-3846.12024.
Boyer, B., Mitton, T., and Vorkink, K. (2010). Expected Idiosyncratic Skewness. Review of Financial Studies 23, 169–202. DOI: 10.1093/rfs/hhp041.
Brickley, J., Coles, J., and Terry, R. (1994). Outside directors and the adoption of poison pills. Journal of Financial Economics 35, 371–390. DOI: 10.1016/0304-405X(94)90038-8.
Brunnermeier, M., Gollier, C., and Parker, J. (2007). Optimal Beliefs, Asset Prices and the Preference for Skewed Returns. American Economic Review, 97,159–65. DOI: 10.1257/aer.97.2.159.
Burgman, T. (1996). An Empirical Examination of Multinational Capital Structure. Journal of International Business Studies 27, 553–570. DOI: 10.1057/palgrave.jibs.8490143.
Bushman, R., Chen, Q., Engel, E., and Smith, A. (2004). Financial accounting information, organizational complexity, and corporate governance systems. Journal of Accounting and Economics 37, 167-201. DOI: 10.1016/j.jacceco.2003.09.005.
Byrd, J. and Hickman, K. (1992). Do outside directors monitor managers? Evidence from tender offer bids. Journal of Financial Economics 32, 195–222. DOI: 10.1016/0304-405X(92)90018-S.
Callen, J.L. and Fang, X. (2015a). Religion and Stock Price Crash Risk. Journal of Financial and Quantitative Analysis 50, 69-195. DOI: 10.1017/S0022109015000046.
Callen, J.L. and Fang, X. (2015b). Short interest and stock price crash risk. Journal of Banking and Finance 60, 181-194. DOI: 10.1016/j.jbankfin.2015.08.009.
Callen, J.L. and Fang, X. (2013). Institutional investor stability and crash risk: Monitoring vs. short-termism? Journal of Banking and Finance 37, 3047–3063. DOI: 10.1016/j.jbankfin.2013.02.018.
Callen, J.L., Hope, O.-K., and Segal, D. (2005). Domestic and Foreign Earnings, Stock Return Variability, and the Impact of Investor Sophistication. Journal of Accounting Research 43, 377–412. DOI: 10.1111/j.1475-679x.2005.00175.x.
Carhart, M.M. (1997). On the Persistence in Mutual Fund Performance. Journal of Finance 52, 57-82. DOI: 10.1111/j.1540-6261.1997.tb03808.x.
Caves, R. (1971). International corporations: The Industrial Economics of Foreign Investment. Econometrica 38, 1-27.
Chen, J., Hong, H., and Stein, J. (2001). Forecasting crashes: trading volume, past returns, and conditional skewness in stock prices. Journal of Financial Economics 61, 345–381. DOI: 10.1016/S0304-405X(01)00066-6.
Chi, J.D. and Lee, D.S. (2010). The conditional nature of corporate governance. Journal of Banking and Finance 34, 350–361. DOI: 10.1016/j.jbankfin.2009.08.001.
Conrad, J., Dittmar, R.F., and Ghysels, E. (2013). Ex Ante Skewness and Expected Stock Returns. Journal of Finance 68, 85-124. DOI: 10.1111/j.1540-6261.2012.01795.x.
Contractor, F.J., Kundu, S.K., and Hsu, C.C. (2003). A Three-Stage Theory of International Expansion: The Link between Multinationality and Performance in the Service Sector. Journal of International Business Studies 34, 5–18. DOI: 10.1057/palgrave.jibs.8400003.
Cremers, M. and Ferrell, A. (2014). Thirty Years of Shareholder Rights and Firm Value. Journal of Finance 69, 1167–1196. DOI: 10.1111/jofi.12138.
Denis, D.J., Denis, D.K., and Yost, K. (2002). Global Diversification, Industrial Diversification, and Firm Value. Journal of Finance 57, 1951-1979. DOI: 10.1111/0022-1082.00485.
Dimson, E. (1979). Risk measurement when shares are subject to infrequent trading. Journal of Financial Economics 7, 197–226. DOI: 10.1016/0304-405X(79)90013-8.
Dittmar, A. and Mahrt-Smith, J. (2007). Corporate governance and the value of cash holdings. Journal of Financial Economics 83, 599–634. DOI: 10.1016/j.jfineco.2005.12.006.
Doukas, J.A. and Kan, O.B. (2006). Does Global Diversification Destroy Firm Value? Journal of International Business Studies 37, 352–371. DOI: 10.1057/palgrave.jibs.8400203.
Doukas, J.A. and Lang, L.H.P. (2003). Foreign Direct Investment, Diversification and Firm Performance. Journal of International Business Studies 34, 153–172. DOI: 10.1057/palgrave.jibs.8400014.
Doukas, J.A. and Pantzalis, C. (2003). Geographic Diversification and Agency Costs of Debt of Multinational Firms. Journal of Corporate Finance 9, 59–92. DOI: 10.1016/S0929-1199(01)00056-6.
Duru, A. and Reeb, D. (2002). International Diversification and Analysts’ Forecast Accuracy and Bias. Accounting Review 77, 415.433. DOI: 10.2308/accr.2002.77.2.415.
Dyreng, S.D., Hanlon, M., and Maydew, E.L. (2008). Long-Run Corporate Tax Avoidance. Accounting Review 83, 61–82. DOI: 10.2308/accr.2008.83.1.61.
Elyasiani, E., Jia, J., and Mao, C. (2010). Institutional ownership stability and the cost of debt. Journal of Financial Markets 13, 475–500. DOI: 10.1016/j.finmar.2010.05.001.
Errunza, V. and Senbet, L. (1981). The Effects of International Operations on the Market Value of the Firm: Theory and Evidence. Journal of Finance, 36, 401–417. DOI: 10.1111/j.1540-6261.1981.tb00455.x.
Errunza, V. and Senbet, L. (1984). International Corporate Diversification, Market Valuation and Size-Adjusted Evidence. Journal of Finance 39, 727–745. DOI: 10.1111/j.1540-6261.1984.tb03663.x.
Fama, E.F. and French, K.R. (1993). Common Risk Factors in the Returns on Stocks and Bonds. Journal of Financial Economics 33, 3-56. DOI: 10.1016/0304-405X(93)90023-5.
Fama, E.F. and French, K.R. (1997). Industry costs of equity. Journal of Financial Economics 43, 153-193. DOI: 10.1016/S0304-405X(96)00896-3.
Gande, A., Schenzler, C., and Senbet, L.W. (2009). Valuation Effects of Global Diversification. Journal of International Business Studies 40, 1515–1532. DOI: 10.1057/jibs.2009.59.
Geringer, J.M., Beamish, P.W., and DaCosta, R.C. (1989). Diversification Strategy and Internationalization: Implications for MNE Performance. Strategic Management Journal 10, 109–119. DOI: 10.1002/smj.4250100202.
Gilson, S., Healy, P., Noe, C., amd Palepu, K. (2001). Analyst Specialization and Conglomerate Breakups. Journal of Accounting Research 39, 565–582. DOI: 10.1111/1475-679X.00028.
Gomes, L.K. and Ramaswamy, K. (1999). An Empirical Examination of the Form of the Relationship between Multinationality and Performance. Journal of International Business Studies 30, 173–188. DOI: 10.1057/palgrave.jibs.8490065.
Gompers, P., Ishii J., and Metrick, A. (2003). Corporate Governance and Equity Prices. Quarterly Journal of Economics 118, 107-155. DOI: 10.1162/00335530360535162.
Graham, J.R, Harvey, C.R., and Rajgopal, S. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics 40, 3–73. DOI: 10.1016/j.jacceco.2005.01.002.
Grant, R.M. (1987). Multinationality and Performance among British Manufacturing Companies. Journal of International Business Studies 18, 79–89. DOI: 10.1057/palgrave.jibs.8490413.
Harford, J., Humphery-Jenner, M., and Powell, R. The sources of value destruction in acquisitions by entrenched managers. Journal of Financial Economics 106, 247–261. DOI: 10.1016/j.jfineco.2012.05.016.
Hines J.R. and Rice, E.M. (1994). Fiscal Paradise: Foreign Tax Havens and American Business. Quarterly Journal of Economics 109, 149-82. DOI: 10.3386/w3477.
Hitt, M.A., Hoskisson, R.E., and Kim, H. (1997). International Diversification: Effects on Innovation and Firm Performance in Product Diversified Firms. Academy of Management Journal 40, 767–798. DOI: 10.2307/256948.
Hutton, A.P., Marcus, A.J., and Tehranian, H. (2009). Opaque financial reports, R2, and crash risk. Journal of Financial Economics 94, 67-86. DOI: 10.1016/j.jfineco.2008.10.003.
Jin, L. and Myers, S.C. (2006). R2 around the world: New theory and tests. Journal of Financial Economics 79, 257-292. DOI: 10.1016/j.jfineco.2004.11.003.
Jiraporn, P., Kim, Y.-S., Davidson, W.N., and Singh, M. (2006). Corporate governance, shareholder rights and firm diversification: An empirical analysis. Journal of Banking and Finance 30, 947–963. DOI: 10.1016/j.jbankfin.2005.08.005.
Khurana, I. K., Pereira, R., and Raman, K.K. (2003). Does Analyst Behavior Explain Market Mispricing of Foreign Earnings for U.S. Multinational Firms? Journal of Accounting, Auditing and Finance 18, 453–78. DOI: 10.1177/0148558X0301800403.
Kim, J.-B., Li, Y., and Zhang, L. (2011a). Corporate tax avoidance and stock price crash risk: Firm-level analysis. Journal of Financial Economics 100, 639–662. DOI: 10.1016/j.jfineco.2010.07.007.
Kim, J.-B., Li, Y., and Zhang, L. (2011b). CFOs vs. CEOs: Equity incentives and crashes. Journal of Financial Economics 101, 713–730. DOI: 10.1016/j.jfineco.2011.03.013.
Kim, Y., Li, H., and Li, S. (2014). Corporate social responsibility and stock price crash risk. Journal of Banking and Finance 43, 1-13. DOI: 10.1016/j.jbankfin.2014.02.013.
Klein, A. (2002). Audit committee, board of director characteristics, and earnings management. Journal of Accounting and Economics 33, 375–400. DOI: 10.1016/S0165-4101(02)00059-9.
Kogut, B. (1983). Foreign Direct Investment as a Sequential Process. The Multinational Corporation of the 1980s, edited by C. Kindelberger. Cambridge, MA: MIT Press.
Kogut, B. and Kulatilaka, N. (1994). Operating Flexibility, Global Manufacturing, and the Option Value of a Multinational Network. Management Science 40, 123-139. DOI: 10.1287/mnsc.40.1.123.
Kothari, S.P., Shu, S., and Wysocki, P.D. (2009). Do Managers Withhold Bad News? Journal of Accounting Research 47, 241–276. DOI: 10.1111/j.1475-679X.2008.00318.x.
Krishnaswami, S. and Subramaniam, V. (1999). Information asymmetry, valuation, and the corporate spin-off decision. Journal of Financial Economics 53, 73–112. DOI: 10.1016/S0304-405X(99)00017-3.
Lee, H.-Y., Mande, V., and Son, M. (2008). A Comparison of Reporting Lags of Multinational and Domestic Firms. Journal of International Financial Management and Accounting 19, 28-56. DOI: 10.1111/j.1467-646X.2008.01015.x.
Lee, K. and Kwok, C. (1988). Multinational Corporations vs. Domestic Corporations: International Environmental Factors and Determinants of Capital Structure. Journal of International Business Studies 19, 195–217. DOI: 10.1057/palgrave.jibs.8490381 .
Lim, S., Matolcsy, Z., and Chow, D. (2007). The Association between Board Composition and Different Types of Unitary Disclosure. European Accounting Review 16, 555–583. DOI: 10.1080/09638180701507155.
Liu, C.-L. and Lai, S.-M. (2012). Organizational Complexity and Auditor Quality. Corporate Governance: An International Review 20, 352–368. DOI: 10.1111/j.1467-8683.2012.00914.x.
Lu, J.W. and Beamish, P.W. (2004). International Diversification and Firm Performance: The S-Curve Hypothesis. Academy of Management Journal 47, 598–609. DOI: 10.2307/20159604.
Luo, Y. (2005). Corporate governance and accountability in multinational enterprises: Concepts and agenda. Journal of International Management 11, 1-18. DOI: 10.1016/j.intman.2004.11.001.
Masulis, R., Wang, C., and Xie. F. (2007). Corporate Governance and Acquirer Returns. Journal of Finance 62, 1851-1889. DOI: 10.1111/j.1540-6261.2007.01259.x.
McCahery, J.A., Sautner, Z., and Starks, L.T. (2016). Behind the Scenes: The Corporate Governance Preferences of Institutional Investors. Journal of Finance, forthcoming. DOI: 10.1111/jofi.12393.
Mitchell, W., Shaver, M., and Yeung, B. (1992). Getting There in a Global Industry: Impact on Performance of Changing International Presence. Strategic Management Journal 13, 410–432. DOI: 10.1002/smj.4250130603.
Mitton, T. and Vorkink, K. (2007). Equilibrium Underdiversification and the Preference for Skewness. Review of Financial Studies 20, 1255–1288. DOI: 10.1093/rfs/hhp041.
Morck, R. and Yeung, B. (1991). Why investors Value Multinationality. Journal of Business 64, 165-187. DOI: 10.1086/296532.
Nohria, N. and Ghoshal, S. (1994). Differentiated Fit and Shared Values: Alternatives for Managing Headquarters-Subsidiary Relations. Strategic Management Journal 15, 491–502. DOI: 10.1002/smj.4250150606.
Osma, B.G. (2008). Board Independence and Real Earnings Management: The Case of R&D Expenditure. Corporate Governance: An International Review 16, 116–131. DOI: 10.1111/j.1467-8683.2008.00672.x.
Pan, J. (2002). The jump-risk premia implicit in options: Evidence from an integrated time-series study. Journal of Financial Economics 63, 3–50. DOI: 10.1016/S0304-405X(01)00088-5.
Qian, G. (2002). Multinationality, product diversification, and profitability of emerging us small- and medium-sized enterprises. Journal of Business Venturing 17, 611–633. DOI: 10.1016/S0883-9026(01)00080-5.
Rego, S.O. (2003). Tax-Avoidance Activities of U.S. Multinational Corporations. Contemporary Accounting Research 20, 805-833. DOI: 10.1506/VANN-B7UB-GMFA-9E6W.
Riahi-Belkaoui, A. and Picur, R.D. (2001). The Impact of Multinationality on the Informativeness of Earnings and Accounting Choices. Managerial Finance 27, 82–94. DOI: 10.1108/03074350110767466.
Rugman, A.M. and Verbeke, A. (2004). A Perspective on Regional and Global Strategies of Multinational Enterprises. Journal of International Business Studies 35, 3–18. DOI: 10.1057/palgrave.jibs.8400073.
Sanders, W.G. and Carpenter, M.A. (1998). Internationalization and Firm Governance: The Roles of CEO Compensation, Top Team Composition, and Board Structure. Academy of Management Journal 42, 158–178. DOI: 10.2307/257100.
Tallman, S. and Li, J. (1996). Effects of International Diversity and Product Diversity on the Performance of Multinational Firms. Academy of Management Journal 39, 179–189. DOI: 10.2307/256635.
Thomas, W. (1999). A test of the market’s mispricing of domestic and foreign earnings. Journal of Accounting and Economics 28, 243-267. DOI: 10.1016/S0165-4101(00)00007-0.
Tihanyi, L., Johnson, R.A., Hoskisson, R.E., and Hitt, M.A. (2003). Institutional Ownership Differences and International Diversification: The Effects of Boards of Directors and Technological Opportunity. Academy of Management Journal 46, 195–205. DOI: 10.2307/30040614.
Tsao, S.-M., Lu, H.-T., and Keung, E.C. (2016). Internationalization and Auditor Choice. Journal of International Financial Management and Accounting, forthcoming. DOI: 10.1111/jifm.12056.
Uzun, H., Szewczyk, S. H., and Varma, R. (2004). Board Composition and Corporate Fraud. Financial Analysts Journal 60, 33–43. DOI: 10.2469/faj.v60.n3.2619.
Weisbach, M. (1988). Outside directors and CEO turnover. Journal of Financial Economics 20, 421–460. DOI: 10.1016/0304-405X(88)90053-0.
Wiersema, M. and Bowen, H.P. (2011). The Relationship between International Diversification and Firm Performance: Why it remains a puzzle. Global Strategy Journal 1, 152-170. DOI: 10.1002/gsj.5.
Xiong, J.X., Idzorek, T.M., and Ibbotson, R.G. (2016). The Economic Value of Forecasting Left-Tail Risk. Journal of Portfolio Management 42, 114-123. DOI: 10.3905/jpm.2016.42.3.114.
Xu, N., Li, X., Yuan, Q., and Chan, K.C. (2014). Excess perks and stock price crash risk: Evidence from China. Journal of Corporate Finance 25, 419–434. DOI: 10.1016/j.jcorpfin.2014.01.006.
Yan, S. (2011). Jump risk, stock returns, and slope of implied volatility smile. Journal of Financial Economics 99: 216–33. DOI: 10.1016/j.jfineco.2010.08.011.
Yuan, R., Sun, J., Cao, F., (2016). Directors' and officers’ liability insurance and stock price crash risk. Journal of Corporate Finance 37, 173–192. DOI: 10.1016/j.jcorpfin.2015.12.015.
Copyright (c) 2016 International Journal of Finance & Banking Studies (2147-4486)
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
Authors contributing to IJFBS agree to publish their articles under the Creative Commons Attribution- 4.0 NC license, allowing third parties to share their work (copy, distribute, transmit) and to adapt it, under the condition that the authors are given credit, that the work is not used for commercial purposes, and that in the event of reuse or distribution, the terms of this license are made clear. Authors retain copyright of their work, with first publication rights granted to IJFBS. However, authors are required to transfer copyrights associated with commercial use to the Publisher. The authors agree to the terms of this Copyright Notice, which will apply to this submission if and when it is published by this journal
Submission of an article implies that the work described has not been published previously( exceptin the form of an abstract or as part of a published lecture or academic thesis), that it is not under consideration for publication elsewhere, that its publication is approved by all authors and tacitly or explicitly by the responsible authorities where the work was carried out, and that, if accepted, it will not be published elsewhere in the same form, in English or in any other languages, without the written consent of the Publisher. The Editors reserve the right to edit or otherwise alter all contributions, but authors will receive proofs for approval before publication