Stock Price Crash Risk
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Ying Xue Yuan (Anna)
University of Mississippi
Stock Price Crash Risk
Stock crash price destroys the company’s reputation in the market and among the investors. It also affects the general economy negatively. It is as a result of managers hiding crucial information from the stock market. They fail to observe the ethical business practices recommended in a business environment as they fear the public would question the credibility of the business. Investors are not attracted to invest their funds in such a business and this exposes the company to low performance due to lack of financing. This study looks at the role innovation can play in addressing the effect Stock crash price risks on the performance of an organization, the effect of Stock crash price on investment of a firm and the impact of the political environment on the stock prices. I expect to get critical data from the corporate leaders and public traded companies financial report on areas which need the address. It will offer important insight into the future management and disclosure of stock prices information.
Corporate management is highly concerned with control over stock price as it determines the company value in the market. Stock failure may result in stock price crash risk which is a major problem in terms of the economic performance of the company. Stock price crash risk is a term used to describe the skewness in return distribution in line with risks involved. In most cases, it is experienced when there is huge inflation on the stock prices. Firms are careful not to disclose the stock price paths which are seen as the highest contributor to stock price crash risk and offer a negative view of the company practices and reputation. As used by managers, stock price crash risk is applied to hide the actual risk of the business, especially where there is a risk of the negative implication of the management. It highly damages the company reputation as the company governance is seen as the solution for the stock price issues (Kim, Li, & Li, 2014). Recently, several companies are highly concerned with the occurrence stock price crash risk and how they can be effectively monitored over corporate innovation strategy to avoid the devastating effect it has.
The company management finds reporting on stock price crash risk highly devastating in that it highly affects the company value and financing. By hiding crucial negative information related to stock prices, they target to increase investors and customer confidence (Callen & Fang, 2015). Although the suppression and delay of the release of the news are seen as a solution to the issue, it is always a short term solution hoping to sustain the company reputation. In the long run, the problem gets aggravated as it comes out as a shock in the business market. There is always a huge drop in the overall stock price (Chang, Chen & Zolotoy, 2017).
Future stock price crash risk presents a huge negative value especially in the distribution of the returns from a given company. This calls for considerable research on the issue. Factors such as capital market transactions, poor mechanisms in corporate governance and lack of formal institutional mechanisms lead to declining cash flow as investors lack trust and confidence in investing. Although there is a wide body of knowledge on the determinant of stock price crash risk, there is very little research focus on the corporate innovation strategy. The research aims at addressing the issue around innovation that can predict direct and indirect factors affecting stock prices. Such include investor trading behavior and issues that cause asymmetry.
Small-Scale Pilot Proposal
Before engaging in large scale study, it would be important to evaluate and analyze factors which may cause stock price crash risk. This would set the stage for understanding the larger concept of addressing the problem at the corporate level, especially the focus on the corporate innovation strategy. It would set the basis of understanding how innovation is crucial as a mitigating factor that addresses the most common risk factors. Further, I feel that there are some factors which are external to the company that may lead to stock price crash risk and which require an explicit inquiry among the management team. I could target a specific corporate and a previous manager and chief executive officer who were at the helm when the company experienced stock price crash risk to learn from first-hand information. With a list of critical questions which seek a specific answer on stock price crash, then a semi-structured interview would be fit for this study. It would provide the factors associated with stock price crash risk at the management level, how the company tried to address it and the expected solution that was supposed to be implemented. To conform with the guidelines and regulations set in conducting studies involving human participant, I will first get the approval from the Institutional Review Board. I will also observe the research ethics especially when dealing with sensitive information of a company which wishes to safeguard its reputation. I have also learned these research ethics in my course and wish to apply them in this study.
After getting the project approval from the Institutional Review Board, and conforming to all ethical practices, I will begin the process of identifying current and previous corporate leaders and collecting company data on stock price crash risk report from the identified company. Previous corporate leaders who have been in corporate practice provide an important perspective on the management of stock price especially those who have experienced stock price crash. They had access and experienced the crash a thus they understand factors that led to the occurrence as well as hold the perspective in what could have been done as an alternative. Some companies are also willing to offer their stock price crash risk report especially which was caused by external factors as well as public listed companies in the United States. These companies have availed their financial data for public scrutiny. Such reports would offer important data on the issue under study. Before the interview, I will first study the individual resume in terms of the position they held so as to determine their expected contribution to this study.
With the aim of finding the report online, I will visit the targeted company’s website for such reports. Where it is not available, I will contact the company to confirm if I could pick the report from its physical location. I will make sure that I briefly explain the intention of the access to the report. This will aim at meeting the company’s guidelines in terms of access to information. The second group to contact will be the current and previous corporate stock manager and chief executive officer. I will also briefly explain my study relating to stock price crash risk and my intention to include them in the study to identify the factors leading to such risks. The participant will have the option to remain anonymous and has the right to withdraw their participation at any point of the study. After leaving the message, I will provide my contacts on how they can get back on me to confirm or decline their participation.
Following the access to the financial report, and the stock manager and the chief executive officer to participate, planning on how to analyze the report and how the interview will be carried out will start. As corporate managers and executives have busy schedules, I will ask them to suggest the time and place of their convenience. The interview will also be as brief as possible unless they decide to offer more time. The interview will also be recorded, and the participant will have the decision of whether to be recorded or not. Recording of such an interview is crucial in making sure that I will not miss any of the information conveyed. Lastly, the report collected from different companies will be treated with the confidentiality standards set. Only the needed financial data will be analyzed with the permission from the respective firm.
I hope to get reliable information from this small scale study which will offer important insight into the stock price crash risk before engaging in large scale study. Although the study only looks at the causes of stock price crash risk, it offers the foundation for establishing the solution to such occurrence. This means that the large-scale study which is anticipated will offer clarification of the innovation as a strategy to address all the causes of stock price crash risk. It is, therefore, a critical component of the large-scale study through insightful contribution.
Large-Scale Research Project Methods and Hypotheses
The small-scale study will be limited in some aspects in that it only looks at the causes of stock price crash risk from two companies and two participants (managers and an executive officer). A large-scale study would be the best fit for this study in collecting extensive data from several sources which would increase the research validity and reliability. The research will administer a survey to a large group of participants from different regions. Additionally, the data will be collected from different years of financial reports to identify the consistency in terms of the data collected. Financial reports are not consistent and remain a subjective issue of internal and external influence. This research will identify how innovation as a strategy can help address stock price crash risk by delving deep into the effect Stock crash price risks on the performance of an organization, the effect of Stock crash price on investment of a firm, and the impact of the political environment on the stock prices. This is by looking at the oversea markets, individualism factor, international financial reporting standards, speculative actualities by managers and stock liquidity among other things. By collecting more information on stock price crash risk, the extent to which stock price crash risk effect the economy will be identified.
As was the case with the small-scale study, this study will also seek approval from the institutional review board, which may take time due to the extensive scale of the issues and factors involved. The research project may end up involving confidential information relating to corporate data. This calls for approval of relevant bodies to safeguard the study before commencement. As was the case with the small scale study, this research will involve the collection of data from primary sources which are highly reliable. By recruiting specific human participants who have extensive information, it would be crucial to sample a wide range of population across the United States. It will be the same case for company financial report especially public limited companies that are traded at the New York Security Exchange and which have put their reports public. This will make sure that the data collected is more generalizable and fits the larger global economy. Additionally, as the New York states and city is known as the global economic hub, data collected from the sample in these locations may provide huge insight on the issues which have previously overlooked. It is also critical in terms of business-related innovation which is part of this study. The longitudinal approach of this study makes sure that it will be highly accurate and assess as many factors as possible related to the stock price crash risk. It will be important to analyze each factor independently and related it with the innovation strategy.
At the corporate level, there lacks a clear guideline on how the corporate social responsibility can be used as a tool for improving the company image among the investors. This is also experienced in areas related to the corporate risks as there is no clear and real life solution to such problems. These are some of the limitations this large-scale research aims at addressing (Callen & Fang, 2015). The study will look at real situations such as important factors related to stock crash risks such as the volatility of investments and how it affects the firm’s stock performance. The aspect of introducing innovation as a new means of addressing the problem would necessitate an extensive research to improve on the existing theoretical perspective. As identified by Chang, Chen, & Zolotoy, 2017 in terms of the impact of leaking negative information on the company, this research is based on public information and specific approval from relevant bodies to ensure an in-depth overview of how different factors affect stock prices. The study aims at filling the gaps that exist in previous studies by being extensive and avoiding the limitations noted. Data limitation is a factor that leads to weak research which cannot be generalized or replicated in other environments. However, for this study, a large sample is to be included presenting a large geographical area.
After the IRB has approved the study, collection of data from the sample will commence through emails, physical interview and collection of the reports required. In the email, a sample interview will be attached for the participant to easily understand what is expected from them after they agree to participate in the study. They will also be notified of the allowances offered as an incentive to engage in the study. The allowances will be availed to the participant to cover for any cost they may incur in the process of their engagement in the study. For extensive reach, I will recruit study staff to help in collecting data in different regions. I cannot be able to visit each location especially in collecting hard copy financial report and would instead rely on the assistance from such staff. The staff will be trained on Skype and other online platforms to understand what is expected of them. Where possible I will organize for a physical meeting at our convenience. The surveys will also be accessible online for completion. It will also be carried out in a period of six months to allow for participant convenience and increased data reliability.
In terms of corporate involvement in the study, the focus will be on accessing the financial report. However, on individual involvement, it will be based on their knowledge concerning the stock price crash risk. Among the issues to be included in the survey are the causes of stock price crash as related to the political influence, corporate social responsibility, the role of innovation and technology, stock volatility, inflation, lack of liquidity, organizational commitment on ethical practices, poor financial structures and how innovation can be used to address these issues. Although the inclusion of all these factors may be difficult in the survey, where there is the possibility of administering the survey directly, more factors will be included and recorded. Although these surveys may introduce the limitations of recall error and the Hawthorne Effect (i.e., changed behaviour due to another’s an observation), they accomplish their intent to analyze the participant’s knowledge and input on stock price crash risk.
To recruit the needed large number of participants, I will first publish the research in leading website for a willing individual to participate. Additionally, I will contact the participant directly through emails and phone calls. I will inform them of the availability of allowances to cover on all costs and the inconvenience met. Each participant will get an amount equivalent and determined by the value of the costs they could have incurred. It is averaged that each will incur between 60 and 90 dollars upon the completion of the survey in the six months duration. The study would target for at least 150 participants and 50 corporates financial reports. However, I will first contact at least 250 participants which include about five participants from each state.
This research project is expected to need funding by a tune of $25000. This amount will cover the collection of data over a large geographical area. Most of the funding will go towards providing for the allowances and research assistant salary. To print the survey sample will require about $200 while the advertisement on a popular corporate site will cost about $500. Each of the three research assistants is to be paid $2800
It has been identified that a stock price crash is a major risk that negatively affects the investor and customer perception of the company. At long last, the company reputation is destroyed lowering its access to investors and customers. Although previous studies have identified some of the factors that may lead to stock prices crash risks such as the political influence, stock liquidity and individualism, they fail to offer a comprehensive solution to the problem (Luo, Gong, Lin & Fang, 2016). Stock price crash risk does not only affect the corporate at which the stock has plummeted but also the general economy. For this reason, it is an important field to study and identify an applicable solution. With the growth in the use of technology, the innovative factor has come to offer a solution to real-life situations in the business world. Therefore, my study’s findings would be of both critical in the corporate world and the economic environment. It will prompt corporate governance and policy makers to effectively identify efficient practices in stock management to avoid the risk.
The future of corporates is to provide stable and sustainable returns for investors. This would improve the investment portfolio of the company as well be a highly reputed firm in the market. The critical component involves addressing the issue of concealing financial aspects of the firm. With this research, it will be possible to improve on the issues related to the effect Stock crash price risks on the performance of an organization, address the effect of Stock crash price on investment of a firm and the impact of the political environment on the stock prices
Callen, J., & Fang, X. (2015). Short interest and stock price crash risk. Journal of Banking & Finance, 60, 181-194. DOI: 10.1016/j.jbankfin.2015.08.009.
Chang, X., Chen, Y., & Zolotoy, L. (2017). Stock liquidity and stock price crash risk. Journal of Financial and Quantitative Analysis, 52(4), 1605-1637. https://doi.org/10.1017/s0022109017000473
Kim, Y., Li, H., & Li, Si. (2014). Corporate social responsibility and stock price crash risk. Journal of Banking& Finance, 43, 1-13. DOI: 10.1016/J. jbankfin.2014.02.013.
Luo, J., Gong, M., Lin, Y., & Fang, Q. (2016). Political connections and stock price crash risk: Evidence from China. Economics Letters, 147, 90-92. DOI: 10.1016/j.econlet.2016.08.024.
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