Market share, investor horizon, and stock crash risk

• Published date: 01 January 2024
• Author: Thanh Ngo,Jurica Susnjara,Ha‐Chin Yi
• Date: 01 January 2024
• DOI: http://doi.org/10.1002/jcaf.22667

Received:  July   Revised:  September  Accepted:  September 

DOI: ./jcaf.

RESEARCH ARTICLE

Market share, investor horizon, and stock crash risk

Thanh Ngo1Jurica Susnjara2,3Ha-Chin Yi2

College of Business, Department of

Finance and Insurance, East Carolina

University, Greenville, USA

McCoy College of Business, Department

of Finance and Economics, TexasState

University, San Marcos, USA

Andreas School of Business, Barry

University, Miami, Florida, USA

Correspondence

Jurica Susnjara, Barry University,

NE nd Avenue, Miami Shores, FL ,

USA.

Email: juricas@hotmail.com

Abstract

On a – sample of , firm-year observations, we document strong

evidence of lower stock crash risk for more prominent firms (those with greater

market share). This evidence is consistent across various proxies for stock crash

risk, raw versus instrumented market share, and ordinary least squares versus

logistic regressions. We also find that the market share’s suppressing effect on

stock crash risk is weakened by the relative prevalence of long-term investors.

This moderating effect of investor horizon suggests the quasi-monopolistic insu-

lation from market pressures as the explanation for the reduction in stock crash

risk among more dominant firms.

KEYWORDS

investor horizon, market share, stock crashrisk

JEL CLASSIFICATION

G, G

1 INTRODUCTION

The idea that prominent industry players (those with

larger market shares) have advantages is superficially

self-explanatory.It is the basis for some of the most

historically successful investment strategies, as Warren

Buffett’s approach to value investing is based on Ben-

jamin Graham’s focus on within-industry prominence

(Graham, ). It has also become a renewed point of

concern in academic (University of Chicago, )and

non-academic (Fung, ;Mauldin,) literature, as

well as regulatory circles (Cortellessa, ;Oremusetal.,

). The academic focus heretofore has largely been

on the profitability and return benefits of larger market

share; see Bain (), Collins and Preston (), Demsetz

() and Mann (), among others. There is also some

evidence that increased market share reduces cash flow

volatility (Gaspar & Massa, ). The consensus is that

dominant firms within an industry benefit from a more

stable customer base (Collins & Preston, ). Our study

examines whether these advantages to firms with larger

market shares extend to exhibiting stock returns with

significantly different higher moments. In particular, we

first examine whether such firms are less prone to stock

price crashes than their counterparts. As the main driver

of stock crash risk is corporate hoarding of bad news (Jin &

Myers, ), we then investigate whether the monitoring

potential of institutional shareholders plays a moderating

role in this relationship between market share and crash

risk.

We use , firm-year observations ( unique

firms) from  to  to construct several measures of

stock crash risk: negative conditional skewness of stock

returns, down-to-up volatility ratio, crashes-jumps differ-

ential, as well as a simple dummy for firm-years with a

crash.A firm’s market share is calculated as a ratio of its

sales to all industry-level sales. In order to address possible

endogeneity issues, we first regress market share on firm

characteristics known to affect it, including an instrument

(industry concentration); the predicted values from these

regressions then become the main explanatory variables

in the analyses of stock crash risk. The results are qualita-

tively similar to using raw instead of instrumented market

share.

308 ©  Wiley Periodicals LLC. J Corp Account Finance. ;:–.wileyonlinelibrary.com/journal/jcaf

NGO  . 309

We find that greater market share reduces stock crash

risk. This result holds for all three definitions of stock crash

risk typically used in literature. We also repeat our analy-

ses using a fourth proxy, a crash risk dummy, as well as a

logistic regression in lieu of our baseline OLS models; the

negative effect of market share on stock crash risk holds

consistently regardless of the econometric model used. As

the hoarding of bad news appears to be the main driver

of stock price crashes, we examine the influence of insti-

tutional shareholding (and its monitoring potential) on

the relationship between market share and our proxies for

stock crash risk. Our finding of the negative relationship

between market share and stock crash risk holds whether

institutional shareholders are present or not, and regard-

less of the prevalence of long- or short-term institutional

investors.

While greater market share persistently reduces stock

crash risk, the exact channel through which this occurs

is not a priori clear, despite the established benefits of

increased returns (Collins & Preston, ) and reduced

volatility (Gaspar & Massa, ). What motivates the

more dominant firms’ management to reduce the hoarding

of bad news? One possibility is that as firms increase mar-

ket share their position starts qualitatively approaching a

monopolist’s “quiet life” (Hicks, ). If so, the manage-

ment in such a quasi-monopolistic position may be less

concerned with market pressures. In other words, they

may feel that the (near) market leadership in and of itself

makes their jobs safer relative to smaller competitors even

if the stock price does react negatively to bad news, thereby

reducing the need for bad news hoarding. We refer to this

explanation as the “management insulation hypothesis”.

Another possibility is that the management recognizes the

reduction in firm risk stemming from larger market share

(Collins & Preston, ; Gaspar & Massa, ). More sta-

ble customer base (Collins & Preston, ), the ability to

pass idiosyncratic cost shocks to the consumers (Gaspar

& Massa, ), and other benefits of larger market share

mean that the stock price of a more prominent firm should

not react to bad news as much as the stock price of a sec-

ondary company.In this scenario, it is the firm itself (rather

than its management) that is insulated from market pres-

sures by its moat, thereby reducing the need for bad news

hoarding by the management. We refer tothis explanation

as the “firm insulation hypothesis”.

To investigate which of these channels/hypotheses has

more merit in explaining the relationship between market

share and stock crash risk, we use an approach similar

to Aghion et al. () and look at a moderating factor

for clues. The magnitude of the effect of market share

on stock crash risk appears to be affected by institutional

shareholders’ investment horizon. As a main effect, the

differential between the percentages of long-term and

short-term institutional investors reduces crash risk;

while the overall presence of institutional investors has

monitoring benefits, short-term institutional investors

may have incentives to encourage bad news hoarding (An

&Zhang,). As a moderator of the negative effect of

market share on crash risk, a complementary relationship

between institutional investors’ horizon and market share

would suggest that long-term investors are recognizing the

less pronounced negative effect of bad news. This would

alleviate market pressures associated with short-termism

(Callen & Fang, ) and reduce the need for the man-

agement of more prominent firms to hoard bad news.

Conversely, a substitution effect between institutional

investors’ horizon and market share would suggest that

long-term investors’ monitoring of management reduces

the management’s sense of entrenchment. This would, in

turn, make management of prominent firms more worried

about the negative effects of bad news on their job security,

and lend more credence to the management insulation

hypotheses. Our findings indicate a substitution effect

institutional investors’ horizon and market share, and

point to management insulation as the explanation of the

negative effect of market share on stock crash risk.

We contribute to the growing body of stock crash risk

literature by examining its re lation to a firm’s intra-

industry market share. We also focus on the moderating

effect of institutional shareholders’ presence on suppress-

ing the above relationship, and by doing so shed light

on the motivation behind reduced bad news hoarding

among more dominant market players. Our results are

robust to various model specifications and endogeneity

concerns. The remainder of our paper is organized as

follows. Section reviews extant relevant L iterature and

develops the Hypotheses. Section describes Data and

Methodology. Section describes our initial Results,while

section discusses Robustness checks and moderating

factors. Section concludes.

2LITERATURE REVIEW AND

HYPOTHESIS DEVELOPMENT

The academic literature on market share has been study-

ing some of its many advantages for decades. Bain (),

Collins and Preston (), Demsetz () and Mann

() all find that firms with more market share are more

profitable. As an explanation, Collins and Preston ()

propose a more stable customer base as a product of these

firms’ established reputation, extensive distribution sys-

tems and product differentiation, while Sullivan ()

finds lower cost of capital. The investors may recognize

that these firms’ market share reduces the volatilityin their

earnings (Collins & Preston, ), or that they are better