The role of agency theory in stock price crashes during the COVID-19 crisis

Abstract

This study tests the empirical relevance of agency theory in explaining stock price crashes in U.S. firms. We construct two novel multidimensional indices of managerial opportunism using a broad set of agency-related variables linked to bad news hoarding. Using the COVID-19 pandemic as a natural experiment, we examine whether crisis-induced survival pressures intensify the relation between agency problems and the release of previously withheld bad news. Contrary to expectations, we find no significant association between the agency-based indices and future crashes. These findings challenge the traditional agency-based crash risk explanations and underscore the need to explore alternative mechanisms