Drought, Corporate Investment, and Stock Price Crash Risk: Evidence from China

Abstract

We examine the impact of drought risk on the stock price crash risk of Chinese listed firms from the perspective of corporate investment. Our findings show that an escalation in drought severity increases stock price crash risk. Specifically, the more severe and longer the drought, the higher the stock price crash risk, with this relationship remaining significant for up to three quarters. Furthermore, as drought severity increases, corporate investment efficiency and the proportion of financial assets decrease, leading to higher crash risk. This impact is more pronounced for non-state-owned enterprises, firms with high information transparency, firms in non-drought-sensitive industries, and those located in extremely high-temperature or eastern regions. Our study provides valuable insights for governments aiming to maintain financial market stability in the face of drought disasters.

Keywords: Drought, stock price crash risk, investment efficiency, financial asset holdings