Yasir Shahab (et al.), an Associate Professor at the School of Accounting at the Xijing University in Xi’an makes some interesting and important points about stock price crash risk among Chinese stocks.
To remind, ‘stock price crash risk’ is not just under-performance. It’s the problem (to which Chinese companies are especially prone) of a systematic hoarding of negative information. Like dammed water the negative news builds up until finally, boom!, the dam bursts and the stock price crashes.
The researchers wanted to address two questions. First, is this a problem associated more with controlling CEOs (they chose to focus on pay differentials to finger dangerous Martinets); and second, could the presence of institutional shareholders and female board members mitigate the Martinet-effect?
To cut the researchers long story short the answers are yes, yes and yes. Overbearing CEOs are problems but institutional shareholders and women directors can compensate to some extent.
What was particularly interesting about the piece was the number of women the researchers chose to focus on as being necessary to have the beneficial effect. Noting other research on this subject that described the presence of women Directors as follows: “one is a token, two is a presence, and three is a voice” they concentrated on the effect-of-three to produce their conclusions.
The practical application of this work for investors is to remember the following when seeking to avoid stock price crash risk when investing in China:
- Beware highly paid CEOs. The compensation number is less important than the gap between them and other members of the board and/or management team.
- The higher the institutional shareholding, by and large, the lower the risk of a bad-news-tsunami rolling out at some stage in the future.
- Women board members reduce the chances of bad outcomes when these are associated with a powerful CEO. One or two are not sufficient. Three or more are necessary to ensure a ‘voice’.
You can read the work in full via the following link Female Director Critical Mass.
Happy Sunday.