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Unleashing stock volatility and its implications for stock crash risk: Evidence from China’s price limit policies

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  • Liang, Haoye
  • Sun, Yanqi
  • Xu, Cheng
  • Xiong, Wanfang
  • Cai, Wei

Abstract

This study investigates the causal effects of increased daily stock volatility on the stock price crash risk. We examine the 2020 adjustment of price limits in the Chinese stock market, which significantly increased stock volatility, using it as a quasi-natural experiment. We employed a difference-in-differences approach, and our findings reveal that firms listed on the ChiNext board experienced reduced crash risk following the relaxation of price limits. This reduction is attributed to the influence of price limits on corporate governance, in which a more pronounced effect is observed in firms with less efficient governance structures. Further, we note that wider price limits prompt reduced information asymmetry between firms and investors, which subsequently mitigates stock price crash risk. Reduced crash risk is notably more evident in state owned firms and in firms inside the high technology industry. Our study illuminates how daily price limit relaxation affects the withholding of adverse news and offers significant policy implications for emerging financial markets.

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  • Liang, Haoye & Sun, Yanqi & Xu, Cheng & Xiong, Wanfang & Cai, Wei, 2024. "Unleashing stock volatility and its implications for stock crash risk: Evidence from China’s price limit policies," Research in International Business and Finance, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:riibaf:v:71:y:2024:i:c:s0275531924002484
    DOI: 10.1016/j.ribaf.2024.102455
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    Cited by:

    1. Mbanyele, William & Huang, Hongyun, 2024. "Staggered boards, agency costs and stock price crash risk: Evidence from China," Research in International Business and Finance, Elsevier, vol. 71(C).

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    More about this item

    Keywords

    Price limits; Crash risk; Corporate governance; Information asymmetry;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • 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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