How does management respond to stock price crashes?

Abstract

PurposeThe purpose of this study is to investigate (1) how managers respond to stock price crashes, (2) why they respond and (3) how their responses affect shareholders.Design/methodology/approachThis study employs a panel regression with various firm-level controls and firm- and year-fixed effects. The sample is comprised of 101,532 firm-year observations with 11,727 unique firms from 1950 to 2019. Using mutual fund flow redemption pressure as an exogenous variable to stock price crashes, the paper provides further evidence of the causality of documented findings.FindingsManagement becomes more focused on improving transparency, raising investment efficiency, reducing agency conflicts and regaining the trust of shareholders by investing in social capital and employee welfare. These actions increase firm value. This study also suggests that management undertakes these actions out of concern for their tenure of employment.Originality/valueThe catalysts of stock price crashes are well documented, but much less is known about what happens following stock price crashes. This study provides more insights into the understanding of corporate crisis management practices following adverse events.