The Effect of Stock Price Crash Risk on the Cost of Capital with the Mediating Role of Shareholders’ Ownership

Abstract

Stock prices face several negative and sudden adjustments and managers postpone disclosing the negative/bad news for a long term. A consequence of stock price cash risk may be on the cost of capital which is funds’ cost for a company, or from an investor's perspective, it is the necessary rate of return on the current securities portfolio of a company. This criterion is employed to assess new projects of a company, as well. Accordingly, an issue which has not been significantly addressed in the research about the relationship between stock price cash risk and cost of capital is the mediating role of large shareholders’ ownership, while shareholders essentially own the company and reap the benefits or losses of the firm’s success or failure. Hence, the objective of this research is to investigate the effect of stock price crash risk on the cost of capital with the mediating role of the large shareholders’ ownership. For this purpose, we considered the listed firms in the Tehran Stock Exchange as our case study. Noticeably, the research time scope is 2012-2019. The method of this research is applied and its nature and content are correlational. Both deductive and inductive reasoning frameworks were used to undertake the study and the hypotheses were analyzed by panel analysis approach. The results showed that the stock price crash risk has a positive and significant effect on the cost of capital, however, the large shareholders’ ownership reduces the effect of stock price crash risk on the cost of capital.

Keywords

• stock price crash risk
• cost of capital
• shareholders’ ownership