State Ownership, Implicit Government Bailout Guarantee, and Crash Risk: Evidence From China

Abstract

Using a large sample of Chinese public firms, this study documents that the government intervention via state ownership can mitigate the stock crash risk. The mitigation effect of state ownership is more pronounced in the crisis periods and in the sample of firms with shares held by central government. Further evidence indicates that high state ownership mitigates the crash risk by deterring the short selling activities. Our empirical results reveal that short sellers especially informed short sellers, view high state ownership as the implicit government bailout guarantee against bankruptcy and voluntarily withdraw shares shorted. The decreased informed short selling activities block the incorporation of bad news.

Keywords: State Ownership, Crash Risk