Impact of Macroeconomic Uncertainty on Stock Price Crash Risk : Evidence from the Asia Pacific Region

Wong, Pei Yin (2020) Impact of Macroeconomic Uncertainty on Stock Price Crash Risk : Evidence from the Asia Pacific Region. Masters thesis, Tunku Abdul Rahman University College.

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Abstract

Stock market has been widely recognised for playing a prominent role in a country’s macroeconomic development. Thereby, it is a must for all countries to maintain a stable and robust stock market. However, it is not an easy task as an unexpected stock price crash can happen anytime without any signals, creating a sudden shock to the market due to the abnormal return distribution. In order to explain the extreme negative returns, namely stock price crash risk, this study aims to examine the relationship between macroeconomic uncertainty and stock price crash risk. Moreover, this study also investigates two potential mechanisms through which macroeconomic uncertainty affects stock price crash risk, i.e., firms’ operating performance and firm-specific investor sentiment. This research is conducted based on the top 100 listed firms by market capitalisation in six selected countries in the Asia Pacific region for the period of 2009 to 2019. Among the selected countries, Japan, South Korea and Singapore fall under the category of developed countries, whereas Malaysia, Indonesia and China are categorised as developing countries. The pooled ordinary least squares method is used in this research to carry out the analyses. Based on the analyses, this study concludes that there is a significant and positive connection between macroeconomic uncertainty and stock price crash risk. On top of that, this study further highlights the comparison of results between the developing and developed countries. The results indicate that crash risk of firms in the developing countries are largely affected by global uncertainty. Meanwhile, both country-specific events and global uncertainty exert influence on the crash risk of firms operating in the developed countries. Furthermore, the subsequent analyses imply that firms’ operating performance could be a main mechanism through which global uncertainty affects stock price crash risk. Specifically, the results show that good operating performance moderates (strengthens) the positive relationship between macroeconomic uncertainty and stock price crash risk. Nevertheless, when the model is being re-estimated for the developing countries, good operating performance of firms in the developing countries show a significant impact in weakening the positive relationship between macroeconomic uncertainty and crash risk. In contrast, operating performance is not statistically significant in moderating the positive relationship between macroeconomic uncertainty and crash risk in the developed countries. Meanwhile, this study also finds that higher firm-specific investor sentiment strengthens the positive relationship between macroeconomic uncertainty and stock price crash risk. As a comparison, firm-specific investor sentiment again does not show a significant impact in moderating the positive relationship between macroeconomic uncertainty and crash risk in the developed countries, but it does play a significant role in the developing countries. This indicates that firm-specific investor sentiment will only show its impact on the degree of crash risk in the developing countries, but not in the developed countries. Findings from this research give rise to a few research implications. For instance, policy makers should tailor the policy making and implementation accordingly while taking care of the health of stock market through the mitigation of stock price crashes. Apart from that, this study highlights the importance of firms’ managers to manage their firms in an appropriate manner in order to minimise stock price crash risk.