Purpose – This study examines the effect of control-ownership wedge on stock crash risk. In Korea, controlling shareholders have exclusive control rights compared to their cash flow rights. With increasing disparity, controlling shareholders abuse their power and extract private benefits at the expense of the minority shareholders. Managers who are controlling shareholders of the companies tend not to disclose critical information that would prevent them from pursuing private interests. They accumulate negative information in the firm. When the accumulated bad news crosses a tipping point, it will be suddenly released to the market at once, resulting in an abrupt decline in stock prices. We predict that stock price crash likelihood due to information opaqueness increases as the wedge increases.
Research design, data, and methodology – 831 KOSPI-listed firm-year observations are from KisValue database from 2005 to 2011. Control–ownership wedge is measured as the ratio (UCO −UCF)/UCO where UCF(UCO) is the ultimate cash-fl ow(control) rights of the largest controlling shareholder. Dependent variable CRASH is a dummy variable that equals one if the firm has at least 1 crash week during a year, and zero otherwise. Logistic regression is used to examine the relationship between control–ownership wedge and stock price crash risk.
Results – Using a sample of KOSPI-listed firms in KisValue database for the period 2005–2011, we find that stock price crash risk increases as the disparity increases. Specifically, we find that the coefficient of WEDGE is significantly positive, supporting our prediction. The result implies that as controlling shareholders’ ownership increases, controlling shareholders tend to withhold bad news.
Conclusions – Our results show that agency problems arising from the divergence between control rights and cash flow rights increase the opaqueness of accounting information. Eventually, the accumulated bad news is released all at once, leading to stock price crashes. It could be seen that companies with high control-ownership wedge are likely to experience future stock price crashes. Our study is related to a broader literature that examined the effect of the control-ownership wedge on stock markets. Our findings suggest that the disparity is a meaningful predictor for future stock price crash risk. The results are expected to provide useful implications for firms, regulators, and investors.

Abstract
 1. 서론
 2. 선행연구 및 가설의 전개
 3. 방법론
  3.1. 변수의 설명
  3.2. 검증모형
  3.3. 표본
 4. 분석결과
  4.1. 기초통계량
  4.2. 상관관계분석
  4.3. 분석결과
 5. 결론
  5.1. 연구결과
  5.2. 시사점 및 한계점, 향후 연구방향
 References

• Soo-Joon Chae(Assistant Professor, Division of Business Administration and Accounting, Kangwon National University) | 채수준
• Hae-Young Ryu(Assistant Professor, Department of International Business, Hansei University) | 유혜영 Corresponding Author