Internal Control and Stock Price Crash Risk: Evidence from China

45 Pages Posted: 30 Oct 2015

See all articles by Jun Chen

Jun Chen

Zhejiang University

Kam C. Chan

Western Kentucky University - Department of Accounting and Finance

Wang Dong

Zhejiang University - School of Management

Feida Zhang

University of Queensland

Date Written: October 30, 2015

Abstract

This paper examines the role played by internal control and its five components (i.e., control environment, risk assessment, control activities, information and communication, and monitoring) in alleviating future stock price crash risk. Using a unique dataset from China, we find evidence that internal control is negatively associated with future stock price crash risk. Specifically, control environment and monitoring are significantly and negatively associated with future stock price crash risk. Moreover, the negative association between internal control and crash risk is significantly more pronounced in firms with weak internal and external governance (i.e., audited by non-Big 4 auditors, located in provinces with low market development, and less conservative in accounting) and with poor ability to mitigate impacts of extreme negative events (i.e., non-state-owned enterprises). Our study highlights the delicate role of internal control as a mechanism in preventing crash of stock price.

Keywords: Internal Control; Stock Price Crash Risk; China Studies

JEL Classification: G32; M41

Suggested Citation

Chen, Jun and Chan, Johnny and Dong, Wang and Zhang, Feida, Internal Control and Stock Price Crash Risk: Evidence from China (October 30, 2015). Available at SSRN: https://ssrn.com/abstract=2683714 or http://dx.doi.org/10.2139/ssrn.2683714

Jun Chen

Zhejiang University ( email )

38 Zheda Road
Hangzhou, Zhejiang 310058
China

Johnny Chan

Western Kentucky University - Department of Accounting and Finance ( email )

Bowling Green, KY 42101
United States

Wang Dong (Contact Author)

Zhejiang University - School of Management ( email )

Hangzhou, Zhejiang Province 310058
China

Feida Zhang

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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