The moderating effect of financial constraints on the relationship between stock price crash risk and managerial ability

Abstract

Purpose

This study aims to empirically explore the influence of managerial ability on crash risk and the moderating effect of financial constraints on this interrelationship.

Design/methodology/approach

Using a sample of listed corporations in the Egyptian Stock Exchange during 2018–2021, the authors test the hypotheses by using the measures and methods well established in prior literature. The authors also conduct multiple robustness analyses to ensure the validity of the empirical results.

Findings

The findings suggest that managerial ability can effectively inhibit crash risk. In addition, the authors report that financial constraints significantly dampen this relationship. Thus, financial restrictions play a striking role in hampering the managerial ability to prevent stock crashes. Furthermore, the authors document that the moderating role of severe financing constraints is more prominent during the Covid-19 pandemic period.

Originality/value

The originality of this study stems from the following considerations. First, this study enriches relevant studies on crash risk by providing evidence from one of the emerging markets in the Middle East; thereby, contrasting with those in developed economies. Second, to the best of the authors’ knowledge, this is the first study investigating the moderating impact of financing constraints on the managerial ability and crash risk nexus. Therefore, this work adds value to the extant knowledge by scrutinizing this important issue and providing novel empirical evidence.

Citation

Shelih, R. and Wang, L. (2024), "The moderating effect of financial constraints on the relationship between stock price crash risk and managerial ability", International Journal of Accounting & Information Management, Vol. 32 No. 1, pp. 122-146. https://doi.org/10.1108/IJAIM-03-2023-0065