Macroeconomic Factors and Stock Price Crash Risk: Do Managers Withhold Bad News in the Crisis-Ridden Iran Market?

Abstract

The present study aims to investigate the effects of macroeconomic variables on stock price crash risk in the economically uncertain conditions of Iran’s market. This study also seeks to examine whether there is a significant relationship between some firm characteristics and falling stock prices. The sample of the study includes 152 Iranian companies listed on the Tehran Stock Exchange (TSE) between 2014 and 2019. Furthermore, the research model has been estimated using a fixed effect pattern, and the DUVOL (down-to-up volatility) measure is defined as a proxy for stock price crash risk. Consistent with our expectations, the results show that there is a positive association between the inflation and unemployment rates and stock price crash risk, whereas the GDP and exchange rates are correlated negatively with crash risk. In fact, with rising inflation and unemployment, on the one hand, the amount of savings and the purchasing power of the people have decreased, and on the other hand, it has reduced the sales of companies due to the increase in the pricing of manufactured products. In Iran’s economically uncertain situation due to sanctions, managers are trying to overstate financial performance and conceal bad news to have better access to financing; so, when the total amount of bad news accumulated over time reaches a tipping point, it leads to a stock crash. It also appears that when the exchange rate rises, Iranian investors prefer to buy companies’ shares to maintain the purchasing power of their money. Outcomes also confirm that larger firms and those with higher Return on Assets (ROA) are more sensitive to crash risk.

Earnings Management, Related Party Transactions and Corporate Performance: The Moderating Role of Internal Control

“…What is worth mentioning is that the Iranian market has faced the most severe economic sanctions during recent years. Since the majority of Iranian companies are at risk of bankruptcy, many investors cannot be optimistic about investing in these companies or creditors, and bankers rarely lend to them (Salehi et al 2018a(Salehi et al , 2020Moradi et al 2021). In such catastrophic conditions, managers try to provide good information to the capital market by manipulating accounts so they can absorb more investors (Izadinia et al 2015).…”

“…Among the various variables of measuring corporate financial performance, due to the widespread use of the ratios of ROA and Tobin's Q in most domestic research of the Iranian market and international studies around the world, these two variables have been used in this study to compare our results with others homogeneously and uniformly. Thus, following many previous studies (Bhagat and Bolton 2008;Alipour 2013;Tabassum et al 2013;Pozzoli and Venuti 2014;Shahzad et al 2015;Kumari and Pattanayak 2017;Constantatos 2018;Appiah et al 2020;Zhang and Ayisi 2020;Keskin et al 2020;Moradi et al 2020Moradi et al , 2021Khanifah et al 2020;Pitenoei et al 2021), both accounting-based (return on assets-ROA) and market-based (Tobin's Q) measures of corporate financial performance are used in this study. Given the points made earlier in the research literature section, a company's financial performance can be severely affected by activities related to earnings management and related party transactions.…”

“…As for Iran's market, it can be said that Iran has faced the worst of severe economic sanctions over the past decade, causing many of its companies to struggle with unbelievable financial problems (Salehi et al 2020;Moradi et al 2021). Given that lenders and investors cannot simply trust such companies with a high risk of collapse, firms are expected to show a beautiful picture of their financial situation so that they can gain better financial resources and attract more investors (Moradi et al 2021). Besides, since management performance is mainly evaluated based on corporate profitability in the Iranian market, managers tend to manipulate profits as much as possible to receive more compensation and not lose their jobs (Salehi et al 2018a).…”

“…The type of the business activity should be productive; hence, investment companies, leasing, credit, and financial institutions and banks are not included in our sample due to these companies have quite different natures in terms of reporting and ownership structure (Salehi et al 2018a(Salehi et al , 2020Moradi et al 2021).…”

“…Taking account of the conditions of Table 1 that have been used in many local studies (Salehi et al 2018a(Salehi et al , 2018bTarighi 2019;Behmanesh et al 2020;Moradi et al 2020Moradi et al , 2021, a sample size of 108 TSE manufacturing firms has been selected. The remaining firms in the sample 108…”