Corporate Governance as a Safeguard Against Sentiment-Driven Stock Price Crashes: Evidence from the KSE-100 Index
DOI:
https://doi.org/10.5281/zenodo.17973852Keywords:
Stock Price Crash Risk, Investor Sentiments, Board Structure, Ownership StructureAbstract
Purpose: The study looks at how corporate governance moderates the impact of investor sentiment on stock price crash risk. The research goal is to identify whether robust governance practices can shield businesses from crash risk and sentiment-driven price distortions.
Design/ Methodology: Five proxies are used to measure investor sentiment, as suggested by Baker and Wurgler (2006, 2007). Two components of the corporate governance process are the ownership and board structures. In contrast, stock price crash risk is calculated by two measures, i.e., NSKEW and DUVOL, using KSE-100 index companies from 2010 and 2022. Both the direct and moderating effects are tested using panel regression models.
Findings: The noise trader theory is largely supported by findings. Consistent with previous research, the findings show that investor sentiment positively affects SPCR. Additionally, research indicates that corporate governance reduces the correlation between investor sentiment and the risk of a stock market crash, which is consistent with the agency theory.
Implications: The results will have a big impact on investors, legislators, and regulators. If market players understand how attitude affects crash risk, they will be better equipped to assess firm-level vulnerabilities. Strengthening governance mechanisms, especially ownership and board structures, can increase market stability, decrease information hoarding, and improve transparency.
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