Enterprise Resource Planning System Usage and Stock Price Crash Risk

Abstract

We examine whether Enterprise Resource Planning system (ERP) usage affects the stock price crash risk of Chinese firms and whether the effect differs between state-owned enterprises (SOEs) and non-SOEs. We find that ERP usage is associated with lower stock price crash risk, but this pattern is largely concentrated in non-SOEs, consistent with our arguments that more acute shareholder-manager agency problems and more organizational rigidity can inhibit the successful assimilation of ERP. The results are further confirmed by a difference-in-differences analysis exploiting the privatization of SOEs as a negative shock to their shareholder-manager agency problem and organizational rigidity. Three channels help explain why ERP usage helps lower stock price crash risk: it improves the quality of internal control, reduces the chance of financial restatements, and mitigates information asymmetry, and all effects are concentrated in non-SOEs. Our study is among the first to examine how ERP usage affects stock price crash risk – an overall outcome measure of a firm’s information environment. Using SOEs vs. non-SOEs as a powerful measure of the shareholder-manager agency problem and organizational rigidity, it also represents the first test of the moderating effect of agency problems and organizational rigidity on the effectiveness of ERP usage.

Keywords: ERP adoption; stock price crash risk; internal control; financial restatements; keep up with the Joneses

JEL Classification: G34; G14; G28