A Critique of the Agency Theory Viewpoint of Stock Price Crash Risk: The Opacity and Overinvestment Channels

This study documents a puzzling historical trend in crash risk for US-listed firms: between 1950 and 2019, the firm-year occurrences of idiosyncratic stock price crashes rose from 5.5% to an astonishing 27%. The vastness literature notoriously attributes agency reasons, i.e. self-interested executives who strategically camouflage bad news via financial reporting opacity overinvestment channels. Nonetheless, we document that opacity– overinvestment–crash relations are non-significant, especially period following enforcement Sarbanes–Oxley Act. statistically non-significant also witnessed tests account effect equity-based compensation incentives corporate governance functions. Overall, this criticizes efficacy as channels explaining risk. Our conclusions offer avenues future research pursue rationalizing surge crashes.