The impacts of anti-organized crime on asset prices: Evidence from China

Abstract

We explore how a crackdown on organized crime affects stock returns. We theorize that a crackdown on organized crime is associated with both the governance effect and the uncertainty effect. Using stock earnings data on Chinese A-share listed firms, we find that, on one hand, stock prices experience salient decreases in short-term periods because the uncertainty effect dominates; on the other hand, significantly positive long-term returns have been documented because governance effects dominate. We further show that the stock return decline associated with the uncertainty effect is mainly driven by a change in discount rate, and the positive long-term return may stem from enhanced firm innovation and city business climate. Our findings pass a battery of robustness and endogeneity checks. We contribute to studies on organized crime and determinants of stock prices.