Strengthening corporate governance

The problem​​

Stock price crashes— when there is a sudden or abrupt drop in stock prices—pose serious threats to shareholder value and corporate reputations. While these events often appear unpredictable, a growing body of research links them to weak corporate governance, especially the failure to disclose bad news in a timely manner.

​The research​

Associate Professor Bo Qin and colleagues examines the role of outside directors in reducing stock price crash risk, and the role specifically of director’s equity-based compensation (DEC) (ie partaking in firm ownership). Using U.S. data from public firms between 2008 and 2021, the team investigate whether awarding equity pay to outside directors strengthens their monitoring role or compromises their independence. Findings show that DEC does enhance directors’ monitoring effectiveness, mitigating over-investment, financial misreporting, and bad news hoarding – which sees managers delay or withhold negative information from the public and investors, which when eventually revealed can cause a sudden drop in stock price. They show that not only who directors are matter for board effectiveness and transparency, but how directors are paid.

​The impact​

This study raises timely questions for policymakers and corporate boards on whether introducing DEC could strengthen governance and risk management. While such incentives are not widely adopted in Australia, the results are directly relevant to ongoing debates around board accountability and director remuneration in the Australian context and could support stronger corporate governance practices overall.

Department: Accounting
Area: Corporate governance

Read more