Jialing Zhao (corresponding author, et al.), from the School of Economics at the Lanzhou University takes a fresh look at ‘Stock Price Crash Risk’ i.e. the likelihood a stock will unexpectedly collapse (nearly always) in response to bad-data hoarding by the company’s owners and/or managers.
The ‘fresh look’ here is to see if a company’s adoption of AI provides investors with any clue to whether or not price-crash-risk is mitigated by such behavior? Last week I highlighted a paper on the same price-crash theme but in that case the researchers were showing the adoption of Employee Stock Option Schemes were helping to reduce risk.
Both last week’s paper and the one highlighted this week I think are highlighting the same thing, good corporate governance (CG).
To this work specifically. Yes, firms adopting AI are less risky than peers who are slower off the mark. The main points:
- “AI improves transparency within supply chains by reducing information asymmetry between upstream and downstream firms, thereby enhancing information flow and reducing market friction.”
- “Among AI types, machine learning proves most effective in lowering crash risk due to its data-processing and forecasting capabilities, while natural language processing and computer vision show weaker effects.”
- “The impact of AI is particularly pronounced in non-government-regulated industries [Anybody surprised?] and high-tech firms. Moreover, its risk-mitigating effect becomes increasingly significant over time.”
Another useful due diligence check then. The only caveat I’d add would be to note the study period, from 2001 to 2022, which means results must be very dependent on the back-end of the period.
Therefore companies in the process of transitioning to greater AI adoption may not be as risky as they appear if their otherwise good CG is driving them in that direction but their operations (think, say, big legacy banks) are slowing the rapid introduction of AI.
You can read the note in full via this link Can Artificial Intelligence Reduce Corporate Stock Price Crash Risk?
Happy Sunday.