Unleashing stock volatility and its implications for stock crash risk: Evidence from China’s price limit policies

Abstract

This study investigates the causal effects of increased daily stock volatility on the stock price crash risk. We examine the 2020 adjustment of price limits in the Chinese stock market, which significantly increased stock volatility, using it as a quasi-natural experiment. We employed a difference-in-differences approach, and our findings reveal that firms listed on the ChiNext board experienced reduced crash risk following the relaxation of price limits. This reduction is attributed to the influence of price limits on corporate governance, in which a more pronounced effect is observed in firms with less efficient governance structures. Further, we note that wider price limits prompt reduced information asymmetry between firms and investors, which subsequently mitigates stock price crash risk. Reduced crash risk is notably more evident in state owned firms and in firms inside the high technology industry. Our study illuminates how daily price limit relaxation affects the withholding of adverse news and offers significant policy implications for emerging financial markets.