Do political connections affect stock price crash risk? Firm-level evidence from China

Using a sample of Chinese listed firms in the period from 2003 to 2012, this paper empirically investigates how the presence of politically connected directors affects stock price crash risk. We thereby make a distinction between listed state-controlled firms and privately controlled firms due to their different incentives to appoint politicians as directors on the board. Our empirical results show that politically connected directors exacerbate stock price crash risk in listed state-controlled firms, an effect driven by the appointment of local government officials as directors. In contrast, hiring politicians as directors, particularly central-government-affiliated directors, helps listed privately controlled firms to reduce stock price crash risk. Finally, good quality of institutions does not help to alleviate the positive relationship between political connections and stock price crash risk in listed state-controlled firms. However, it does weaken the role of political connections in reducing crash risk in listed privately controlled firms.     

Do bankers on the board reduce crash risk?

Commercial banker‐directors (CBDs) bring both financial expertise in risk management and conflicts of interest between shareholders and debtholders. The burgeoning literature on stock price crash risk generates important questions of whether CBDs reduce crash risk. Using BoardEx data from 1999 to 2009, we find supporting evidence that the firms with CBDs experience lower stock price crash risk. Moreover, the reduction of crash risk is more pronounced for high‐risk firms under the monitoring of affiliated banker‐directors. The results of this study are robust to the Heckman selection model, propensity score matching, and alternative measures of crash risk.     

Board diversity and stock price crash risk

We show how board diversity influences stock price crash risk. By classifying board diversity into relation-oriented diversity (gender and age) and task-oriented diversity (tenure and education), we find that greater diversity on board can lower the risk of future stock crash. Additional analyses show that the effect of board diversity on future crash risk is stronger for firms with high information opacity and low institutional ownership. Overall, our findings provide new insights and suggest for more diverse boards to improve corporate governance practices.     

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 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.     

Directors' and officers' liability insurance and stock price crash risk

We investigate the impact of directors' and officers' insurance (D&O insurance) on stock price crash risk. We find that D&O insurance in China is negatively associated with stock price crash risk. This association is robust to a series of robustness checks including the use of alternative sample, Heckman two-step sample selection model, propensity score matching procedure, fixed effects model, the inclusion of some possibly omitted variables, and bootstrap method. Further analyses show that the impact of D&O insurance on crash risk is more pronounced in firms with lower board independence, non-Big 4 auditors, lower institutional shareholdings, and weaker investor protection; and the negative relationship between D&O insurance and crash risk is not driven by the eyeball effect. Moreover, we find that D&O insurance purchase is associated with less financial restatements and more disclosure of corporate social responsibility reports. Our findings provide support to the notion that D&O insurance appears to improve corporate governance.     

The value of independent directors: Evidence from sudden deaths

We investigate contributions of independent directors to shareholder value by examining stock price reactions to sudden deaths in the US from 1994 to 2007. We find, first, that following director death stock prices drop by 0.85% on average. Second, the degree of independence and board structure determine the marginal value of independent directors. Third, independence is more valuable in crucial board functions. Finally, controlling for director-invariant heterogeneity using a fixed effect approach, we identify the value of independence over and above the value of individual skills and competences. Overall, our results suggest that independent directors provide a valuable service to shareholders.     

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.     

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.     

Making honest men of them: Institutional investors,financial reporting,and the appointment of female directors to all-male boards

In this paper, we theorize that dedicated institutional investors are more likely than transient institutional investors to appoint female directors to investee firms with all-male boards, particularly those with high opacity. We conjecture that dedicated investors appoint female directors as a governance mechanism to improve the financial reporting quality of these investee firms. Specifically, we find that through the appointment of female directors, dedicated institutional investors trigger the release of stockpiled negative accounting information, thereby increasing the likelihood of a stock price crash risk. We also show that dedicated investors, through the appointment of female directors, improve investee firms' corporate disclosure environment by decreasing earnings management. Finally, we find that through continued service on investee firms' boards, female directors reduce the future likelihood of a stock price crash.     

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.     

Board social capital and stock price crash risk

Review of Quantitative Finance and Accounting - We show how board social capital influences stock price crash risk. Considering that directors are embedded in two kinds of social...     

Audit firm's Confucianism and stock price crash risk: Evidence from China

This study examines the association between audit firm's Confucianism and stock price crash risk. We postulate that Confucian moral standards predict a mixed relationship between audit firm's Confucianism and stock price crash risk. Using a large sample of listed firms in China during 2006–2018, we find that audit firm's Confucianism is positively related with client's future stock price crash risk, implying that Confucianism of audit firm aggravates client's bad news hoarding behavior. The effect is more pronounced for client without female auditors and/or with closer personal relationship with auditors. Mechanism analysis shows that audit firm's Confucianism exacerbates crash risk by worsening audit quality and information transparency. Political discipline and external monitoring help to alleviate the negative influence of audit firm's Confucianism on stock price crash risk.     

Does alternative data reduce stock price crash risk? Evidence from third-party online sales disclosure in China

This study empirically investigates the effect of releasing alternative data on firm-specific price crash risk. Using the public launch of a firm's third-party online sales data in a well-known Chinese financial database as an exogenous shock, we find that stock price crash risk significantly decreases with the disclosure of third-party online sales data. The results are robust to a series of endogeneity corrections and robustness checks. We also find that the reduction of stock price crash risk is due to the decrease in managers' bad news withholdings and the increase in the accuracy of market expectations. In addition, the negative association between third-party online sales disclosure and crash risk is more pronounced for firms with weaker external governance, higher earnings volatility, greater likelihood of sales manipulation, and lower book-to-market ratio. Our findings yield important implications for a comprehensive understanding of the information disclosure effect of online sales data in the capital market and the mechanisms to reduce stock price crash risk.     

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。     

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.     

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.     

Women in the boardroom and their impact on governance and performance

We show that female directors have a significant impact on board inputs and firm outcomes. In a sample of US firms, we find that female directors have better attendance records than male directors, male directors have fewer attendance problems the more gender-diverse the board is, and women are more likely to join monitoring committees. These results suggest that gender-diverse boards allocate more effort to monitoring. Accordingly, we find that chief executive officer turnover is more sensitive to stock performance and directors receive more equity-based compensation in firms with more gender-diverse boards. However, the average effect of gender diversity on firm performance is negative. This negative effect is driven by companies with fewer takeover defenses. Our results suggest that mandating gender quotas for directors can reduce firm value for well-governed firms.     

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.     

Competition For Board Seats Following Stock‐For‐Stock Mergers

We examine the board structure of firms following stock‐for‐stock mergers. We find that former target inside (outside) directors are more likely to join the combined firm board when target insiders (outsiders) have a relatively strong position on the pre‐merger target board. The relative size of the target firm, target firm profitability, and target blockholder ownership also influence whether target directors join the combined board. We conclude that competition for board seats on the combined board is won by target directors with greater bargaining positions.