National Tax Service Connection and Stock Price Crash Risk: Evidence from Korea

Abstract

This article uses a unique institutional setting in Korea to investigate effects of managers' connections with the financial regulator on the managers' bad news hoarding behavior, proxied by stock price crash risk measures. Regression analysis shows that connected managers are likely to withhold negative information. That is, connected managers feel protected and believe that the firm is unlikely to receive financial sanctions, and such beliefs induce them to hide and hoard negative news. Furthermore, we find that these relationships are manifested only when the firm is not an affiliate of the Chaebol group or is financially constrained.