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Local corruption and stock price crash risk: Evidence from China

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  • Cao, Peng
  • Qin, Lu
  • Zhu, Hongquan

Abstract

Using a large sample of Chinese firms over the period of 2004–2017, this study investigates whether and how local corruption affects stock price crash risk. We find that firms headquartered in regions with higher levels of corruption tend to have higher future stock price crash risk. This relation is more pronounced for local state-owned enterprises (SOEs), and local corruption induces crash risk by pushing firms to engage in inefficient over-investment. Our results suggest that corruption induces managers to undertake value-destroying projects and withhold bad news, which will lead to an accumulation of bad news. As the bad news or bad performance accumulates and reaches a tipping point, a large amount of negative firm-specific information comes out, resulting in a crash. The findings enrich the understanding of local corruptions' microeconomic impact on firm's investment decisions and also contribute to the study of external factors that do influence crash risk.

Suggested Citation

  • Cao, Peng & Qin, Lu & Zhu, Hongquan, 2019. "Local corruption and stock price crash risk: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 240-252.
    • Handle: RePEc:eee:reveco:v:63:y:2019:i:c:p:240-252
    DOI: 10.1016/j.iref.2018.11.006
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    More about this item

    Keywords

    Local corruption; Stock price crash; Local SOEs; Over-investment;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O20 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - General

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