Market stabilization fund and stock price crash risk: Evidence from the post-crash period

Abstract

As market stabilization funds (MSFs) are usually established to stabilize a short-term stock market disaster, most of them will “retreat” after crashes. However, there is an exception, i.e., the Chinese MSFs, which still purchase and hold a large number of shares even after the stock market crash. This paper concentrates on the trading behavior of the Chinese MSFs in a post-crash period by investigating the association between MSFs holding and future stock price crash risk. We show that, during the post-crash period, stocks held by MSFs experience significantly lower future crash risk than those un-held by MSFs in the short run. Moreover, this negative association cannot be explained by the “trading channel,” “signaling channel,” or “monitoring channel.” Our findings corroborate that the Chinese MSFs, which manage massive resources from taxpayers, are capable of detecting stocks with lower future crash risk.