Abstract
This study analysed the effect of Sock Price Crash Risk (SPCR) on the cost of capital in Chinese listed firms in the Shenzhen stock exchange and the shanghai Stock Exchange. A sample of 290 firms based on the highest value of assets of each firm was used. The cost of capital consists of two factors; the cost of equity (COE) and the cost of debt (COD). The SPCR is measured by using two statistics, one is NCSKEW means the negative coefficient of skewness of the firm-specific weekly returns and the second is DUVOL that means Down to-Up Volatility used to measure the crash likelihood weekly return of firm-specific and used the Modified PEG ratio model of Eston approach to measuring the cost of equity. We used panel data to run the regression model analyses. SPCR was found to have a significantly positive relationship with the cost of equity and cost of debt. Also, the sample was divided into the State-Owned enterprise (SOEs) and Non-State-Owned enterprises (NSOEs) for comparison. The results show that the impact of SPCR on the COE and COD is stronger in SOEs than NSOEs. The regulators need to improve and strengthen the development of laws and regulations related to company information disclosure, to reduce the cost of capital of listed companies and improve the efficiency of financing the Chinese capital market. Companies need to work together to strengthen internal controls, create a good disclosure environment, and prevent the SPCR.
Highlights
The risk of a stock market crash measures the possibility of a listed company's stock crash, this may be due to principal issues and information asymmetry (Hutton et al, 2009; Kothari et al, 2009)
Non-StateOwned enterprises (NSOEs) consist of total number observation is 366 with the mean value 0 with 0 standard deviations and the min. value is 0 and the maximum value is 0
The results indicate that the association between Sock Price Crash Risk (SPCR) and cost of equity (COE) is prominent and positively significant in State-Owned enterprise (SOEs) than NSOEs which is confirming our Hypothesis 3
Summary
The risk of a stock market crash measures the possibility of a listed company's stock crash, this may be due to principal issues and information asymmetry (Hutton et al, 2009; Kothari et al, 2009). The investors start selling stocks and stock prices start to crash when negative information accrues and explodes by which the SPCR arises (Jin and Myers, 2006). The SPCR affects the capital market and causes resource misallocation and negatively affects the real economy (Wang et al, 2015). The singularity of China's capital market surges and falls has been ranked at the top of the world (Dai et al, 2019).
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