How Does the Accounting Conservatism Affect the Stock Price Crash Risk in Pakistan : The Complementary Role of Managerial and Institutional Ownership?

The conservatism of accounting and robustness of accounting information disclosure may restrain the irrational behavior of investors and help to reduce the risk of stock price crashes. This study aims to explore this in the context of developing country Pakistan. More specifically, this study investigates the effect of accounting conservatism on stock price crash risk. Moreover, we also examine the complementary role of managerial and institutional ownership in strengthening this effect. We argue that a higher level of shares held by management and institutional investors would further strengthen the impact of accounting conservatism in avoiding a price crash. This study conducts the panel data analysis of 155 nonfinancial firms listed in PSX from 2007 to 2019. This study calculates the C-Score to measure the accounting conservatism with the help of the (Basu, 1997) model. This study measures the firm’s stock price crash risk by calculating the DUVOL of weekly share prices according to the (Xu et al., 2012) model. This study finds that there is a significant negative effect of accounting conservatism on firms’ stock price crash risk. This study also finds that managerial ownership enhances the stock price crash risk of the sample firms significantly as a moderator while there is no significant moderating influence of institutional ownership. The firms’ managers try to hide the bad news. This is because of the weak governance system of Pakistan. Furthermore, the ownership structure in Pakistan is centralized. This study suggests that institutional investors should consider the transparency of information. They should build pressure on management to anticipate the bad news with the help of the conservatism principle. The competent authorities of Pakistan i.e., SECP and PSX should consider agency conflicts. They should direct the firms’ management to share equal information in time regardless of whether the information is good or bad for stock prices