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Market liquidity migration’s effects on the relationship between stock liquidity and stock price crash risk: Evidence from China

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  • Tang, Yunshu
  • Xie, Wenyan
  • Li, Dong Andrew
  • Ruan, Yaoyun

Abstract

This research examines the market liquidity’s structural migration in 2016–2017 and its effects on the stock liquidity-risk relationship. We observe and conduct a Granger causality test to empirically verify the ongoing structural migration from small-cap to large-cap stocks in 2016–2017. We then replicate the inverse relationship between stock liquidity and stock price crash risk. We find that the structural migration demonstrates an incremental effect on the inverse liquidity-risk relationship across the board except for the state-owned companies (probably due to their unique nature and favorable perceptions from the investors). Further, robustness tests over the seven-year, three-chairman-term timeline suggest the structural migration prompted by the then Chairman, Liu, an exogenous event to the stock market. Overall, this research elucidates the mechanism underlying the structural migration’s incremental effect on the stock market in general and the state-owned companies in particular, extending the stock liquidity-risk relationship literature to a deeper, more dynamic context.

Suggested Citation

  • Tang, Yunshu & Xie, Wenyan & Li, Dong Andrew & Ruan, Yaoyun, 2023. "Market liquidity migration’s effects on the relationship between stock liquidity and stock price crash risk: Evidence from China," The Quarterly Review of Economics and Finance, Elsevier, vol. 91(C), pages 158-169.
    • Handle: RePEc:eee:quaeco:v:91:y:2023:i:c:p:158-169
    DOI: 10.1016/j.qref.2022.10.013
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    Cited by:

    1. Zuo, Yu & Bai, Tao, 2024. "Major shareholder equity pledges and the risk of stock price crash based on external audit quality," Finance Research Letters, Elsevier, vol. 63(C).

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    More about this item

    Keywords

    Market liquidity’s structural migration; Granger causality test; Stock liquidity-risk relationship; State-owned companies; “big mouth” management style;
    All these keywords.

    JEL classification:

    • B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Econometrics; Quantitative and Mathematical Studies
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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