Director liability reduction and stock price crash risk: Evidence from Korea

Abstract

This article investigates the effect of a firm's adoption of director liability reduction coverage laws on their directors’ bad news hoarding behavior. Using unique Korean institutional settings, we find that, compared to directors of noncovered firms, those of covered firms are more likely to withhold negative information, proxied by stock price crash risk measures. Our regression analysis implies that legal protections of a company through DLR coverage makes directors relatively relaxed about litigation risks, which induces them to take advantage of the laws. Furthermore, we find that the relation manifests when the firm is owned by a high proportion of foreign investors, covered by many financial analysts, and is less regulated by listed exchange. © 2020 International Review of Finance Ltd (IRF)