The effect of Bankruptcy Risk on Stock Price Crash Risk by Emphasis on Debt Maturity

Document Type : Original Article

Authors

• Hassan Chenari ¹
• roya darabi ²
• Shahram Chaharmahali ²

¹ Department of Accounting, Financial Sciences Faculty, Kharazmi University, Tehran, Iran

² Department of Accounting, South Tehran Branch, Islamic Azad University, Tehran, Iran

10.22067/ijaaf.2023.81475.1305

Abstract

Purpose: Existing studies rely mainly on the agency theory argument for management motivations to hide bad news. However, the investor's irrational belief can cause prices to fall from the investor's perspective. Whether concealing bad news - that is, lack of transparency - increases heterogeneity among investors needs to be tested empirically. Developing a direct scale of investor heterogeneity is a challenging task that may cause the research studies to examine the role of investor heterogeneity in causing a crash. Concerning default risk as a prerequisite for price falls, a refined representative of default risk - for example, breach of debt contract rather than firm size or leverage - can be helpful in better understanding why companies with high default risk are more prone to crash risk. This study investigates the effect of bankruptcy risk on stock price risk, emphasising debt maturity in companies listed on the Tehran Stock Exchange.

Design/methodology/approach: For the purpose of the study, the financial statements of 150 companies in the period 2010-2021 have been collected. Multivariate regression with panel data was

Findings: The results of hypothesis testing show that the effect of bankruptcy risk on stock price crash risk with an emphasis on debt maturity is not statistically significant and research hypotheses are not accepted.

Originality/value: The research results can be helpful for investors, creditors, policymakers, standards and regulatory bodies. It can also effectively develop and improve the quality of financial reporting and economic development by identifying existing weaknesses and challenges and explaining theoretical frameworks.

Keywords

• Stock Price Crash Risk
• Bankruptcy Risk
• Debt Maturity

Main Subjects

• Finance

---