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Director liability reduction and stock price crash risk: Evidence from Korea

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  • Sanghak Choi
  • Hail Jung

Abstract

This article investigates the effect of a firm's adoption of director liability reduction coverage laws on their directors’ bad news hoarding behavior. Using unique Korean institutional settings, we find that, compared to directors of noncovered firms, those of covered firms are more likely to withhold negative information, proxied by stock price crash risk measures. Our regression analysis implies that legal protections of a company through DLR coverage makes directors relatively relaxed about litigation risks, which induces them to take advantage of the laws. Furthermore, we find that the relation manifests when the firm is owned by a high proportion of foreign investors, covered by many financial analysts, and is less regulated by listed exchange.

Suggested Citation

  • Sanghak Choi & Hail Jung, 2021. "Director liability reduction and stock price crash risk: Evidence from Korea," International Review of Finance, International Review of Finance Ltd., vol. 21(4), pages 1492-1502, December.
    • Handle: RePEc:bla:irvfin:v:21:y:2021:i:4:p:1492-1502
    DOI: 10.1111/irfi.12327
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    Cited by:

    1. Huilin Zhang & Xiaoran Ni & Qi Jin, 2023. "Litigating crashes? Insights from security class actions," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(3), pages 2935-2963, September.

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