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Can a firm's hierarchical complexity affect its stock price behavior? Evidence from stock price crash risk

Hoàng Long Phan (School of Economics, The University of Danang, Da Nang, Vietnam)
Ralf Zurbruegg (Adelaide Business School, University of Adelaide, Adelaide, Australia)

International Journal of Managerial Finance

ISSN: 1743-9132

Article publication date: 5 September 2023

Issue publication date: 13 May 2024

197

Abstract

Purpose

This paper examines how a firm's hierarchical complexity, which is determined by the way it organizes its subsidiaries across the hierarchical levels, can impact its stock price crash risk.

Design/methodology/approach

The authors employ a measure of hierarchical complexity that captures the depth and breadth of how subsidiaries are organized within a firm. This measure is calculated using information about firms' subsidiaries extracted from the Bureau van Dijk (BvD) database that allows the authors to construct each firm's hierarchical structure. The data sample includes 2,461 USA firms for the period from 2012 to 2017 (11,006 firm-year observations). Univariate tests and panel regression are used for the main analysis. Two-stage-least-squares (2SLS) instrumental variable regression and various other tests are employed for robustness check.

Findings

The results show a positive relationship between hierarchical complexity and stock price crash risk. This relationship is amplified in firms with a greater number of subsidiaries that are hierarchically distanced from the parent company as well as in firms with a greater number of foreign subsidiaries in countries with weaker rule of law.

Originality/value

This paper is the first to investigate the impact hierarchical complexity has on crash risk. The results highlight the role that a firm's organizational structure can have on asset pricing behavior.

Keywords

Acknowledgements

This research is funded by the Funds for Science and Technology Development of The University of Danang (Project No.: B2019-DN04-28).

Citation

Phan, H.L. and Zurbruegg, R. (2024), "Can a firm's hierarchical complexity affect its stock price behavior? Evidence from stock price crash risk", International Journal of Managerial Finance, Vol. 20 No. 3, pp. 692-721. https://doi.org/10.1108/IJMF-06-2023-0299

Publisher

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Emerald Publishing Limited

Copyright © 2023, Emerald Publishing Limited

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