Does Crackdown on Corruption Reduce Stock Price Crash Risk? Evidence from China

44 Pages Posted: 31 Aug 2018 Last revised: 2 Apr 2019

See all articles by Yunsen Chen

Yunsen Chen

Central University of Finance and Economics (CUFE)

Yuan Xie

Fordham University

Hong You

Central University of Finance and Economics (CUFE) - School of Accountancy

Yanan Zhang

Central University of Finance and Economics (CUFE) - School of Accountancy

Date Written: August 23, 2018

Abstract

This study examines whether crackdown on political corruption in China affects future stock price crashes. Using data from corruption-related prosecutions, we find that firms under prosecuted official jurisdictions experience a significant decrease in crash risk after the crackdown. Cross-sectional tests show that results are more pronounced for firms with higher political dependence on governments and for firms with worse information environment. Moreover, channel tests provide direct evidence that crackdown decreases crash risk by reducing political risk and bad news hoarding. Overall, our study offers novel evidence on how crackdown on corruption benefits firms.

Keywords: Corruption; Crackdown; Crash risk; Political risk; Bad news hoarding

Suggested Citation

Chen, Yunsen and Xie, Yuan and You, Hong and Zhang, Yanan, Does Crackdown on Corruption Reduce Stock Price Crash Risk? Evidence from China (August 23, 2018). Journal of Corporate Finance, Vol. 51, 2018. Available at SSRN: https://ssrn.com/abstract=3237345

Yunsen Chen

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Yuan Xie

Fordham University ( email )

441E Fordham Road
Bronx, NY 10458
United States

HOME PAGE: http://www.fordham.edu/info/22941/full-time_faculty/4970/yuan_xie

Hong You

Central University of Finance and Economics (CUFE) - School of Accountancy ( email )

Beijing
China

Yanan Zhang (Contact Author)

Central University of Finance and Economics (CUFE) - School of Accountancy ( email )

39 South College Road, Haidian District
Beijing
China

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