Investigating the Relationship between Working Capital Management and Stock Price Crash Risk

Abstract

The main purpose of this study is to investigate the effect of working capital management on stock price crash risk. The sample includes 103 Iranian firms listed on the Tehran Stock Exchange from 2013 to 2017. Panel data analysis with fixed effect estimation has been used to analyze the relationship between working capital management and stock price crash risk. Cash conversion cycle, working capital requirement, current, and quick ratios were applied as comprehensive measures for working capital management, and Hutton’s model was applied as a measure for stock price crash risk. The results indicate that there is a negative relationship between working capital indicators and stock price crash risk. Therefore, managers can use working capital strategies to decrease the risk of the stock price crash. Furthermore, asymmetry information may, in fact, increase a manager’s incentive to use working capital strategies to reduce the stock price crash risk.