Power Distance, Political Uncertainty and Stock Price Crash Risk: International Evidence

Posted: 1 Jul 2019

See all articles by Qiaoling Su

Qiaoling Su

Xiamen University

Jianming Ye

Xiamen University

Xunchang Zhang

Jinan University

Date Written: September 1, 2016

Abstract

This paper tests the proposition that the unbalanced power distance (i.e., Hofstede Cultural Dimensions- Power Distance Index) and individual stock price crash risk. We examine the stock price behavior of 35 countries’ listed firms from 2004 to 2016 and use multivariate analyses to document that societal power distance is important in explaining the propensity of releasing accounting information. These propensities create a psychological hint on timing management, particularly for bad news. As countries with higher Power Distance (PD) prefer to keep things under control, the result will be fewer unexpected stock price crashes during the long windows. However, because the higher Power Distance countries devote the market to maintain temporary peace before and during the periods of political events (i.e., national elections), the results will be changed to an increase in crash risks after the political events window. Consistent with these predictions, we find that, in the higher PD countries, companies have less incentive to hide negative information and to generate stock price crashes. This situation is substantially changed during the post-political windows when the firms and the ways of spreading information are more controlled by the government. Our findings suggest that formal mechanism alone is insufficient to explain the behaviors of corporate disclosure that entangle with informal instruments.

Keywords: culture, power distance, political uncertainty, crash risk

JEL Classification: G12, G14, G15

Suggested Citation

Su, Qiaoling and Ye, Jianming and Zhang, Xunchang, Power Distance, Political Uncertainty and Stock Price Crash Risk: International Evidence (September 1, 2016). Available at SSRN: https://ssrn.com/abstract=3412597

Qiaoling Su (Contact Author)

Xiamen University ( email )

Xiamen, Fujian 361005
China

Jianming Ye

Xiamen University ( email )

Xiamen, Fujian 361005
China

Xunchang Zhang

Jinan University ( email )

Huang Pu Da Dao Xi 601, Tian He District
Guangzhou, Guangdong 510632
China

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