Does a national industrial policy promote financial market stability? A study based on stock price crash risk

Whether the implementation of a national industrial policy can maintain stability in the financial market is a question of theoretical and practical significance. Using data from China’s non-financial listed firms from 2007 to 2020, we find that a national industrial policy lowers stock price crash risk. We find that the effect of an industrial policy on lowering stock price crash risk is more pronounced in regions with low levels of regional marketization and if firms have high external uncertainty, low total asset turnover, greater earnings management and receive small increments of long-term loans and fewer government subsidies, suggesting that industrial policies lower stock price crash risk by improving firm fundamentals and reducing external uncertainty, agency costs and information asymmetry.     

Economic policy uncertainty and stock price crash risk

This paper studies the impact of economic policy uncertainty on stock price crash risk using data from China. We develop a new index to measure Chinese economic policy uncertainty and find that economic policy uncertainty has a remarkable positive effect on stock price crash risk. However, the effect reverses later. The results also indicate that the positive effect of economic policy uncertainty on stock price crash risk is more prominent for state‐owned enterprises. Moreover, this effect is more prominent for firms with higher information asymmetry and firms with greater disagreement among investors, indicating that economic policy uncertainty affects crash risk through two mechanisms: managers’ concealment of bad news and investors’ heterogeneous beliefs.     

Zero-leverage policy and stock price crash risk: Evidence from Korea

This study examines the difference in stock price crash risk between zero-leverage and non-zero-leverage firms. We find that zero-leverage firms have a significantly higher future stock price crash risk than non-zero-leverage firms. Next, we find that the positive relation between zero-leverage policy and future stock price crash risk is more pronounced when firms have higher controlling shareholders' ownership and foreign ownership. We also find that the positive relation is more pronounced for firms with low cash holdings than for those with high cash holdings. Further, we find that the positive relation is stronger for dividend-paying firms than non-dividend-paying firms. Our results are robust to alternative estimation specifications and endogeneity concerns. Overall, our findings shed light on the extent to which extreme corporate financial policy has an impact on future stock price crash risk. Our empirical evidence also provides meaningful implications for how stakeholders (especially investors) predict stock price crash risk in the context of extremely conservative capital structure.     

Stock price crash risk and CEO power: Firm-level analysis

This study examines the impact of stock price crash risk on future CEO power. Using a large panel sample with 17,816 firm-year observations, we posit and find a significant negative impact of stock price crash risk on CEO power, suggesting that CEO power becomes smaller after stock price crashes. We also find that our results are stronger for firms with female CEOs and are largely driven by firms with shorter-tenure CEOs. In addition, we find that the significant negative impact of stock price crash risk on CEO power is diminished for firms with strong corporate governance. Our study responds to the call in Habib, Hasan, and Jiang (2018) by providing more empirical evidence on the consequences of stock price crash risk.     

Board directors with foreign experience and stock price crash risk: Evidence from China

This study examines the impact of board directors with foreign experience (BDFEs) on stock price crash risk. We find that BDFEs help reduce crash risk. This association is robust to a series of robustness checks, including a firm fixed effects model, controlling for possibly omitted variables, and instrumental variable estimations. Moreover, we find that the negative association between BDFEs and crash risk is more pronounced for firms with more agency problems, weaker corporate governance, and less overall transparency. Our findings suggest that the characteristics of board directors matter in determining stock price crash risk.     

CFOs versus CEOs: Equity incentives and crashes

Using a large sample of U.S. firms for the period 1993-2009, we provide evidence that the sensitivity of a chief financial officer's (CFO) option portfolio value to stock price is significantly and positively related to the firm's future stock price crash risk. In contrast, we find only weak evidence of the positive impact of chief executive officer option sensitivity on crash risk. Finally, we find that the link between CFO option sensitivity and crash risk is more pronounced for firms in non-competitive industries and those with a high level of financial leverage.     

Do geographically nearby major customers mitigate suppliers’ stock price crash risk?

This study examines the impact of geographically nearby major customers on suppliers' stock price crash risk. Using a sample of Chinese A-share listed firms and their top five (major) customers during the period 2008–2019, we find a significantly negative association. This association is robust in a series of robustness checks, including the use of instrumental variables estimations, propensity score matching procedure, and Heckman two-step sample selection model. The mitigating effect of supplier?customer proximity on crash risk is more pronounced for suppliers with lower corporate transparency and greater operational uncertainty. Finally, we identify two possible mechanisms through which geographically nearby major customers reduce suppliers’ crash risk: fewer financial restatements and higher accounting conservatism of suppliers. The findings of this study indicate that listed firms may choose geographically nearby customers to reduce crash risk.     

Local speculative culture and stock price crash risk

Using unique city gambling conviction data in China as a proxy for a local speculative culture, we examine the impact of such a culture on stock price crash risk. We find that firms in regions with a stronger speculative culture are more likely to experience future stock price crash risk. The results are consistent after using 2SLS regression analysis (IV) and staggered difference-in-difference (DID) analysis to mitigate endogeneity concerns. Further analysis shows that overinvestment, excessive debt, accounting conservatism and charitable donations are the main channels through which local speculative culture affects stock price crash risk. We also find that the positive relationship between local speculative culture and stock price crash risk is more salient for small firms and firms with managers with a cultural backgrounds similar to the local culture. Our study implies that the local culture plays an important role in the practice of corporate governance.     

Does media coverage deter firms from withholding bad news? Evidence from stock price crash risk

Spurred by the informational and disciplinary roles that the media fulfils, this study provides initial evidence on how higher media coverage is associated with a lower tendency of firms withholding bad news, proxied by stock price crash risk. Our main findings are robust to a battery of tests that account for endogeneity concerns including a difference-in-differences analysis based on newspaper closures that exogenously reduce media coverage and a regression-discontinuity design analysis based on the top band of Russell 2000 and lower band of Russell 1000 index stocks. Additional tests reveal that the negative relation between media coverage and stock price crash risk is concentrated within firms with more negative and novel news coverage and firms with higher litigation or reputation risks. We also find that media plays an important role in reducing future stock price crash risk when there is reduced monitoring by other external monitoring mechanisms such as external auditors, financial analysts, and institutional shareholders.     

Internal whistleblowing and stock price crash risk

We investigate the impact of internal whistleblowing on stock price crash risk in China. We expect that internal whistleblowing plays a crucial role in preventing firms from misconducting, which would result in a lower stock price crash risk. Consistent with this conjecture, the empirical evidence negatively correlates internal whistleblowing and stock price crash risk. Our results remain robust when adopting the instrumental variable, propensity matching method, and Heckman's two-stage model. Path analysis shows that internal whistleblowing lowers the crash risk by reducing firms' accounting violations and executives' frauds. The effect is more pronounced in firms with a positive organizational environment and non-state-owned firms. Overall, the study contributes to the emerging literature on the governance role of whistleblowing.     

海归高管抑制了股价崩盘风险吗？

以我国A股上市公司2009—2017年数据为样本,研究高管的海外经历对公司未来股价崩盘风险的影响。发现海归高管有助于降低公司未来股价的崩盘风险,在多种稳健性检验并控制内生性问题后,以上结论仍然成立。另外,海归高管降低股价崩盘的效果在分析师关注较少的企业以及外部审计质量较弱的企业中表现得更加明显。机制分析表明,海归高管通过降低公司过度投资以及提高会计信息质量来抑制股价崩盘风险。     

基于制度环境视角的非效率投资与股价崩盘风险研究

研究宏观层面的治理因子对企业非效率投资的调节作用,进而研究价格崩盘的成因。发现：较高的市场化进程、较低的政府干预程度和完善的法治环境都有助于抑制由非效率投资行为引发的股价崩盘风险。进一步的研究表明,企业非效率投资主要由代理成本而非信息不对称问题产生,进而影响价格崩盘;国有企业非效率投资对股价崩盘风险的影响大于非国有企业,但是制度环境的抑制作用对国有企业样本不明显。本文的研究结果为从宏观层面降低股价崩盘风险提供了经验证据,为维护我国股市稳定发展,推进国家治理体系建设提供了政策启示。     

Stock market crashes,firm characteristics,and stock returns

A number of studies have investigated the causes and effects of stock market crashes. These studies mainly focus on the factors leading to a crash and on the volatility and co-movements of stock market indexes during and after the crash. However, how a stock market crash affects individual stocks and if stocks with different financial characteristics are affected differently in a stock market crash is an issue that has not received sufficient attention. In this paper, we study this issue by using data for eight major stock market crashes that have taken place during the December 31, 1962–December 31, 2007 period with a large sample of US firms. We use the event-study methodology and multivariate regression analysis to study the determinants of stock returns in stock market crashes.     

Divergence of Cash Flow and Voting Rights,Opacity, and Stock Price Crash Risk: International Evidence

This study investigates whether and how the deviation of cash flow rights (ownership) from voting rights (control), or simply the ownership‐control wedge, influences the likelihood that extreme negative outliers occur in stock return distributions, which we refer to as stock price crash risk. We do so using a comprehensive panel data set of firms with a dual‐class share structure from 20 countries around the world for the period of 1995–2007. We predict and find that opaque firms with a large wedge are more crash prone than opaque firms with a small wedge. In addition, we predict and find that the positive relation between the wedge and crash risk is less pronounced for firms with more effective external monitoring and for firms with greater growth opportunities. The results of this study are broadly consistent with Jin and Myers’s theory that agency costs, combined with opacity, exacerbate stock price crash risk.     

Major government customers and stock price crash risk

This paper studies whether government’s participation in product market, as a customer, affects supplier firms’ stock price crash risk. Using a sample of U.S. firms from 1980 to 2015, we find robust evidence that the presence of major government customers is associated with a lower level of stock price crash risk for supplier firms. Further, we show that government customers can lower suppliers’ crash risk by imposing monitoring activities on suppliers and/or reducing suppliers’ operational risk, leading to a reduction in supplier managers’ bad news hoarding behavior. Overall, our results indicate that government spending, as an important public policy, can significantly affect shareholders’ value by mitigating stock price crash risk.     

Earnings management and stock price crashes post U.S. cross-delistings

We examine whether cross-delisted firms from the major U.S. stock exchanges experience an increase in crash risk associated with earnings management. Consistent with our prediction, we find that earnings management has a greater positive impact on stock price crash risk post cross-delisting when compared to a control group of firms that remain cross-listed. More importantly, we find that this effect is more pronounced for cross-delisted firms from countries with weaker investor protection, poorer quality of their information environment and less conservative accounting practices. Our findings are robust to the potential endogenous nature of the cross-delisting decision, alternative measures of stock price crash risk and information asymmetry. We interpret our results as evidence of a “reverse bonding effect” following cross-delistings from U.S. stock exchanges.     

Do mandatory risk factor disclosures reduce stock price crash risk?

We test whether voluntary or mandatory risk factor disclosures (RFDs) in 10-K filings is associated with a reduction in stock price crash risk. We find that the level of mandatory RFDs in 10-K filings is associated with a reduction in stock price crash risk but find no similar relationship for voluntary RFDs. We exploit two exogenous shocks to mitigate endogeneity concerns that remain to be addressed in the literature. We investigate the moderators for this relationship and find the reduction is magnified among firms with higher information asymmetry, higher litigation risk, or better corporate governance. Overall, our findings identify a potential avenue to mitigate stock price crash risk and provide evidence that mandated RFDs contain useful information content and benefit investors.     

Corporate board reforms around the world and stock price crash risk

We examine the impact of corporate board reforms around the world on stock price crash risk. Using a sample of firms in 41 economies that passed major board reforms between 1990 and 2012, we find that board reforms are associated with a significant reduction in crash risk of about 13%. The effect of reforms on crash risk is stronger among firms with more severe ex ante agency problems. Our analysis further suggests that board reforms reduce crash risk by improving financial transparency and enhancing investment efficiency. In sum, our findings are consistent with the notion that board reforms improve board oversight and mitigate agency problems.     

Stock price crash risk and internal control weakness: presence vs. disclosure effect

This study examines the stock price crash risk for a sample of firms that disclosed internal control weaknesses (ICW) under Section 404 of the Sarbanes‐Oxley Act (SOX). We find that in the year prior to the initial disclosures, ICW firms are more crash‐prone than firms with effective internal controls. This positive relation is more pronounced when weakness problems are associated with a firm's financial reporting process. More importantly, we find that stock price crash risk reduces significantly after the disclosures of ICWs, despite the disclosure itself signalling bad news. The above results hold after controlling for various firm‐specific determinants of crash risk and ICWs. Using an ICW disclosure as a natural experiment, our study attempts to isolate the presence effect of undisclosed ICWs from the initial disclosure effect of internal control weakness on stock price crash risk. In so doing, we provide more direct evidence on the causal relation between the quality of financial reporting and stock price crash risk.     

R around the world: New theory and new tests

Morck, Yeung and Yu show that R² is higher in countries with less developed financial systems and poorer corporate governance. We show how control rights and information affect the division of risk bearing between managers and investors. Lack of transparency increases R² by shifting firm-specific risk to managers. Opaque stocks with high R²s are also more likely to crash, that is, to deliver large negative returns. Using stock returns from 40 stock markets from 1990 to 2001, we find strong positive relations between R² and several measures of opaqueness. These measures also explain the frequency of crashes.