Stock Price Crash Research Articles

Independent Directors' Opposition, Earnings Management and the Risk of Stock Price Crash

The purpose of this paper is to analyze the legal practice and theoretical basis of the implied secrecy clause in the United States, and to explore the domestic development of the implied secrecy obligation in our country. Based on this, this article uses the American case and law to establish the standard to judge whether our country's counterpart undertakes the implied confidentiality obligation. First of all, the first part of this article summarizes the existing legal framework of our country on the obligation of implied confidentiality and its challenges in judicial practice, and summarizes the views of the academic community on this issue. By combing the current situation of legislation, analyzing the problems in judicial practice, and studying the opinions of academic circles, this paper proposes that the implied obligation of confidentiality in the field of trade secrets should be affirmed clearly. Secondly, the second part of the comparative law perspective, a comparative analysis of the common law system and the civil law system on the implied provisions of the different theories, so as to provide theoretical support for our country to learn from the experience of the and the United States. Finally, the third part from the legislative basis, judicial practice and practical needs of the three dimensions, demonstrated the application of implied confidentiality obligations of the rationality and necessity, it further strengthens the importance of implied secrecy obligation in legal practice.

Controlling shareholders' stock pledges and stock price crash risks

This study explores the influence of controlling shareholders' stock pledges on the risk of stock price crashes. The findings reveal that controlling shareholders' stock pledges have a positive correlation with the risk of stock price crashes. Specifically, corporations with controlling shareholders who have pledged their stocks are exposed to a higher risk of stock price crashes. However, a strong regulatory environment can mitigate the effect of controlling shareholders' stock pledges on the risk of stock price crashes.

Official visits and stock price crash risk

Against the backdrop of continuous stock price crashes, preventing stock price crash risk has become an increasingly important item on the Chinese government's agenda in recent years. Using a unique dataset on official visits manually collected from news reports posted on corporate websites during the 2010–2020 period, we examine the impact of official visits on the stock price crash risk of visited companies. We find that official visits contribute to a reduction in stock price crash risk. This effect is more pronounced among privately controlled companies, information-opaque companies, and financially constrained companies. Taking the political rankings of visiting officials into consideration, we find that municipal officials have a more significant influence on stock price crash risk. We further establish the underlying mechanisms and find that official visits reduce crash risk through the provision of more preferential resources, such as government subsidies and bank loans, and by attracting more public attention, such as media and analyst coverage. Overall, our research provides evidence on how officials can prevent stock price crash risk.

How Capital Market Liberalization Influences Stock Price Crash Risk: The Intermediate Effect of Corporate Accounting Clarity

The introduction of the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect programs represents a pivotal juncture in the evolution of Chinas capital markets, signaling a significant move towards increased openness and integration. These initiatives have sparked considerable academic interest, underscoring their potential to transform the financial landscape. This research employs these programs as a quasi-natural experiment to investigate their profound impact on financial stability. Our analysis focuses on a comprehensive dataset encompassing A-share firms listed on both the Shanghai and Shenzhen Stock Exchanges over a thirteen-year period, from 2008 to 2021. Employing a robust difference-in-differences analytical approach, this study seeks to discern the effects of capital market liberalization on the incidence of stock price crashes. The empirical findings reveal a compelling association: greater openness in capital markets correlates significantly with a reduced risk of stock price crashes. This correlation is largely attributed to enhancements in corporate accounting transparency facilitated by these initiatives. Thus, these findings underscore the dual role of enhanced capital market openness in not only fostering stability in stock prices but also in mitigating market risks, safeguarding investor wealth, reducing systemic financial vulnerabilities, and fostering sustainable development across capital markets. This study contributes meaningfully to the existing literature on stock price crash risk by providing nuanced insights and actionable recommendations for policymakers and market participants alike, aiming to further bolster capital market openness and resilience.

Firm-level political risk and stock price crashes

In this study, we examine the relationship between firm-level political risk and stock price crash risk. Using a broad dataset of 4230 U.S. firms, 38,097 firm-year observations from 2002 to 2019, we reveal a positive association between political risk and stock price crash risk. These findings are robust to several model specifications and endogeneity checks. By using the Brexit referendum as a quasi-natural experiment, we provide evidence of a causal relationship between political risk and crash risk. Through channel analysis, we identify that this relationship is mediated via higher idiosyncratic volatility, lower price informativeness, and higher distress risk. We also find that our results are more pronounced in intangible-intensive firms. Interestingly, we show that managers of these firms respond to political risk by engaging in bad news hoarding. Finally, strong (external or internal) corporate governance mechanisms can moderate the positive relationship between political risk and stock price crash risk.

Related party M&A, goodwill impairment and stock price crash risk: Evidence from Chinese capital market

This article takes A-share market M&A cases from 2010 to 2022 as samples to investigate the influence mechanism of related M&A, goodwill impairment and the risk of the stock price crash, and the differences of the above effects in different industries. The study finds that related M&A presents a higher premium rate in the asset-light industry, which deepens the risk of goodwill impairment and brings a greater stock price crash risk. Further research shows that frequent related M&A behavior deepen the positive correlation between goodwill impairment and stock price crash risk. The enhancement effect is pronounced in the asset-light industry. This paper deepens the comprehensive understanding of related M&A and enriches the related research on goodwill impairment, which makes it specific reference value to small and medium investors.

Staggered boards, agency costs and stock price crash risk: Evidence from China

In this study, we leverage unique, hand-collected data to explore the impact of staggered boards on the likelihood of future stock price crashes. Our analysis shows that companies with staggered boards are at a higher risk of future stock price crashes compared to their counterparts with non-staggered boards, particularly in firms with elevated agency costs and those not state-owned. Additionally, we find that staggered boards exacerbate this risk by failing in their monitoring and advisory capacities. Evidence of this failure emerges through various indicators of diminished oversight, including managerial opportunism, financial reporting manipulation, insider trading, and a rise in both investment and operational inefficiencies. This study not only contributes to the ongoing debate about the implications of staggered boards but also sheds new light on the associated agency costs.

The Impact of ESG Performance on Stock Price Crash Risk: A Study Based on the Perspective of Auditor Opinion Influence

The Impact of ESG Performance on Stock Price Crash Risk: A Study Based on the Perspective of Auditor Opinion Influence

How does asset redeployability affect stock price crash risk?

AbstractHow does a firm's asset redeployability affect its future stock price crash risk? Asset redeployability, which refers to the ease of selling corporate assets, allows managers to opportunistically exploit asset transactions to manage earnings to hoard bad news, thereby increasing future crash risk. Using a large sample of US firms, we find that firms with higher asset redeployability are more likely to experience a future stock price crash. We further find that this positive association is stronger for firms experiencing greater internal and external pressure to manage earnings. Our study highlights that relying on redeployable assets to orchestrate earnings undermines shareholders' interests, particularly when internal and external pressures incentivize upward earnings management.

The role of biodiversity risk in stock price crashes

This study examines whether and how firms’ biodiversity risk exposure affects future stock price crash risk. By analyzing data from US listed companies, we find a significant and positive association between biodiversity risk exposure and future crash risk. The additional analysis indicates that the biodiversity-related transition risks caused by regulations still significantly increase future crash risk, but management's sentiment toward biodiversity-related issues does not significantly affect future crash risk.

Independent Directors' Opposition, Earnings Management and the Risk of Stock Price Crash

Independent Directors' Opposition, Earnings Management and the Risk of Stock Price Crash

Share pledge and accounting conservatism in share-pledging firms: Evidence from a natural experiment in China.

This paper focuses on firms in which insiders pledge their shares as collateral for loans. By investigating a natural experiment-China's enactment of provisions on share reductions that restrict pledge creditors' cashing-out behavior-we find that pledging firms exhibited more conservative financial reporting after the implementation than non-pledging firms. This effect was pronounced in firms with a higher ratio of pledged shares, a longer maturation period of the pledged shares, and more concentrated pledge creditors. Additionally, we show that pledging firms increased their accounting conservatism after the shock, leading to a lower risk of margin calls and stock price crashes. The effect on accounting conservatism was stronger in firms with controlling pledgers or when the pledge creditors were banks. Our results remained consistent after we performed several robustness tests. These behaviors are economically logical because the provisions heighten creditors' liquidity risk and the potential losses of loan default. Pledging shareholders embrace more accounting conservatism to mitigate creditors' concerns about agency costs and avoid triggering margin calls. Our findings provide direct support that creditors have a real demand for accounting conservatism and highlight the impact of shareholder-creditor conflicts on the financial reporting policies of pledging firms.

Narrative innovation disclosure and stock price crash risk: Evidence from Chinese listed firms

Using the 2012 revision of Guideline No. 2, we construct a difference-in-differences model to investigate the impact of narrative innovation disclosure on stock price crash risk among Chinese A-share listed firms from 2008 to 2020. We find that narrative innovation disclosure positively affects a firm’s crash risk. From the dual perspectives of the discloser and receiver, we reveal the mechanism. The strategic behaviors of firms with limited creativity, combined with investors’ challenges in fully comprehending innovations, contribute to increased information asymmetry and reduced the quality of disclosures, thereby rising stock price crash risks. Furthermore, we show that the impact of innovation disclosure on crash risk is more significant in firms operating within poor legal and market environments, and in those with overvalued stock prices. This study provides suggestions for improving the innovation disclosure system to reduce stock price crash risks and promote stability in capital markets for emerging countries.

Bank Competition, Loan Portfolio Concentration and Stock Price Crash Risk: The Role of Tone Ambiguity

AbstractWe examine the association between loan portfolio concentration, competition and stock price crash risk in the US banking industry. We find that during economic downturns, banks with poorly diversified loan portfolios that operate in competitive markets are more likely to crash. Importantly, we show that this link is channelled through aggressive earnings management and ambiguous annual reports. Therefore, managerial ambiguity can serve as an early warning signal of information obfuscation, which can eventually lead to stock price crashes. As a quasi‐natural experiment, we use the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2018. This policy lowered the regulatory requirements and oversight for a specific group of large banks. The results of a difference‐in‐differences analysis support our baseline findings and add to the ongoing debate on the roots of the 2023 banking crisis. Therefore, our findings can be informative to market participants, regulators and policy makers.

Federal judge ideology, securities class action litigation, and stock price crash risk

AbstractThis study investigates whether and how federal judge ideology affects firm‐specific stock price crash risk. Using a comprehensive sample of US firms, we find a decline in the likelihood of future stock price crashes for firms headquartered in more liberal circuits. In identifying potential mechanisms, we show that liberal judge ideology reduces information opacity, risk‐taking behaviours and overinvestment, and thus curbs stock price crash risk. Furthermore, the curbing effect is more salient for firms with poor monitoring quality and those in low social capital areas. Overall, this study elucidates how federal judge ideology affects capital markets.

The Effect of News Photo Sentiment on Stock Price Crash Risk Based on Deep Learning Models

The Effect of News Photo Sentiment on Stock Price Crash Risk Based on Deep Learning Models

Insider opportunistic trading through fast sales: Evidence from China

Using a sample of insider sales from firms listed on China's A-share market from 2010 to 2023, we provide robust evidence that insiders engage in fast sales when stocks have better pre-sale performance, compared to slow sales. Additionally, these fast sales predict lower abnormal returns in both the short and long term. Insider opportunistic trading through fast sales is more prominent in firms with high levels of information asymmetry and among insiders facing intense information competition. We find weak evidence that independent directors, institutional investors, and analyst coverage play a role in reducing such insider opportunistic trading. Finally, insider opportunistic trading through fast sales also predicts subsequent stock price crashes and extremely negative earnings news. Our findings help decipher the information content of insider sales in China's market.

Product Market Competition and Stock Price Crash Risk: Evidence from China

Synopsis The research problem This study analyzes the relationship between product market competition (PMC) and stock price crash risk in China, especially for firms with weak corporate governance and a lower-quality information environment. Motivation Emerging capital markets like China have less-developed financial systems and institutions compared to developed capital markets like Europe and the United States, making them more susceptible to stock price crash risk. The impact of product market competition (PMC) on corporate decision-making has attracted considerable attention from scholars, especially given the increasingly intense and complex strategic competition in global markets and uncertainty in the world today. However, the effect of PMC on a firm’s stock price crash risk has not been thoroughly explored. Therefore, this study investigated how PMC affects managers’ tendency to hoard bad news and how this behavior contributes to the risk of stock price crashes. The test hypotheses We tested two competing hypotheses: PMC is negatively correlated with crash risk, and PMC is positively correlated with crash risk. Target population This study should be of interest to stakeholders, including firm managers, practitioners, regulatory authorities, policymakers, and investors. Adopted methodology This study employed ordinary least squares (OLS), difference-in-differences analysis (DID), and path analysis. Analysis Using a sample of Chinese A-share listed manufacturing firms from 2000 to 2021, this study found that competitive pressure from the product market encouraged managers to hide bad news, thereby increasing future stock price crash risk. Moreover, we performed additional tests to examine how PMC affected stock price crash risk. Findings We found robust evidence that PMC significantly increases stock price crash risk. Further tests showed that the effect of PMC on crash risk is more pronounced for firms with weak corporate governance and a lower-quality information environment. We also provide evidence that firms in highly competitive industries tend to disclose fewer negative words in the management discussion and analysis section of the annual report and fewer risk factors in the internal control report. Moreover, we show that operational risk is the underlying driver through which PMC affects crash risk.

The impact of corporate financialization on stock price crash risk

In recent years, the continuous occurrence of stock price crashes and the significant financialization trend of non-financial firms have aroused widespread attention from regulators, investors and academia. Based on the panel data of China’s A-share non-financial listed companies from 2010 to 2023, this paper designed a rigorous empirical research program and utilized descriptive statistical analysis, correlation analysis, multiple regression analysis and other analytical methods to explore the impact of enterprise financialization on stock price crash risk. The empirical results show that enterprise financialization is conducive to attenuating future stock price crash risk.

Can State-owned Shareholders' Participation Curb Stock Price Crash Risk? --Based on Empirical Evidence of A-share Private Listed Companies from 2008 to 2019

After state-owned shareholders buy shares in private listed companies, they will more or less bring about some changes in the development of private listed companies. The existence of state-owned shareholders can enable listed companies to obtain more resources, which will play a certain role in promoting the company's operation. These favorable conditions will also attract more attention from the outside world. In order to study whether these changes will affect or restrain the company's stock price crash risk during the company's development, we take the stock price data of private listed companies in A-shares from 2008 to 2019 as the object of analysis. This paper studies the influence of state-owned shareholders' participation on the risk of stock price collapse of private companies. Through the regression model analysis, it is found that there is a significant negative correlation between the state-owned shareholders' participation in the private listed company and the company's stock price crash risk, that is, the state-owned shareholders' participation in the private listed company can significantly restrain the company's stock price crash risk.