Political turnover and stock crash risk: Evidence from China

Abstract

This paper investigates the effects of political turnover on firm-specific stock crash risk. Using data from listed firms and top prefectural-level officials in China, we find that the turnover of Communist Party secretaries significantly increases the stock crash risk of firms under their jurisdictions, but that the turnover of mayors does not. Political turnover impacts both state-owned enterprises (SOEs) and non-SOEs, but the effects are more pronounced for the latter. This indicates that political turnover exerts significant information-releasing behaviors and that the non-state sector is more sensitive to shifts in political power. Further highlighting the link between political personnel and the stock market, we find that the impact of political turnover on stock crash risk depends on the extent of the disruption of political connections. Our results are robust to alternative model specifications. Additional tests show that opaque firms are more likely to experience higher crash risk when political turnover happens. We also provide evidence that the effects of political turnover on stock price crash risk are partly, but not entirely, mediated by media coverage about affected firms.