Corporate Derivatives Usage, Information Environment, and Stock Price Crash Risk

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)1263–1297
Journal / PublicationEuropean Accounting Review
Issue number5
Online published12 May 2021
Publication statusPublished - 2022


This study investigates the effect of corporate derivatives usage on stock price crash risk. We test two competing hypotheses. Under the transparency hypothesis, derivatives usage reduces information opacity and lowers crash risk. Under the speculation hypothesis, derivatives usage exacerbates managerial short-termism and increases crash risk. We find evidence supporting the transparency hypothesis. This result is robust to sensitivity checks including a two-stage treatment model, difference-in-differences test, and subsample analysis. We further show that curbing bad news hoarding, curtailing overinvestment, and increasing breadth of ownership are potential channels through which derivatives usage mitigates crash risk. Additional tests on the effect of derivatives usage on likelihood of securities class-action litigation provide consistent results.

Research Area(s)

  • derivatives usage, stock price crash risk, information opacity, agency theory