Extended Abstract A Study of the Relationship between Management Ability with Investment Efficiency and Stock Price Crash Risk

Stock price crash risk in the market is a key concern of investors, and research in this field is important for the capital markets. Increasing the phenomenon of stock price crash will result in investor’s pessimism about investing in the stock market, and this could finally force the investors to withdraw their investment. On the other hand, investment decisions are widely dependent on information asymmetry and agency problems. Therefore, the management ability which is a qualitative component that captures the intrinsic talent of managers by varying circumstances, can increase investment efficiency by reducing information asymmetry and agency costs, and thus provide the optimal use of resources, accountability, transparency, fairness and rights of all stakeholders companies.
Hypothesis: The aim of this study is to investigate the relationship between efficient investment and management ability with stock price crash of listed companies on the Tehran Stock Exchange.
Data of 152 listed companies on the Tehran Stock Exchange during the period of 2006 to 2015 is investigated. To measure the stock price crash risk from the regression model Hutton et al. (2009) and the investment efficiency from the extended version of Biddle et al. (2009) model and the management ability, Demerjian et al.(2013) model, based on accounting variables is used. Data are analyzed by using panel data approach and multiple regressions model.
The results show that there is not a significant relationship between management ability and the investment efficiency; there is a significant and positive relationship between management ability and stock price crash risk. One of the reasons that led to such results in the Iran capital market may refer to the inability to analyze managers from the current and future conditions of the company and industry, and to utilize their intelligence and talent to achieve personal returns, raising information asymmetry and agency costs between stokholders, creditors and managers, lack of voluntary disclosure of information in accounting reportings, ups and downs of the capital market in recent years and the existence of a dominant government structure over Iran's economic system
There are two views regarding the impact of management ability on investment efficiency: An optimistic view, which states that a competent manager can use economic assets in order to increase shareholder's wealth in an appropriate time; and based on this view, there is a significant positive relationship between the ability of managers and investment efficiency. The pessimistic view argues that, in addition to the agency theory and conflict of interest between managers and owners, managers may use their talents in order to achieve their personal interests; or may act with high confidence and overestimate the return on investments because of their high intelligence, so that this fact will also cause losses. Our research results support pessimistic view. Therefore, the stock exchange should provide a mechanism to prevent opportunistic management practices for hoarding information and creating price bubbles and investor's uncertainty about such information.