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

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.