State control and stock price crash risk: new evidence of the conservatism of state-owned enterprises

Abstract

Purpose

This paper examines the impact of state control on stock price crash risk given whether and how ownership structure affects stock price crash risk is relatively underexplored.

Design/methodology/approach

The sample includes 2,285 Chinese firms listed in the Shanghai and Shenzhen Stock Exchanges. Panel data is used for conducting the analysis and endogeneity is addressed with instrumental variable estimation and by testing how stock price crash risk is affected when the ultimate controller changes from a private-owned company to a state-owned enterprise.

Findings

The authors find that state control is negatively associated with future stock price crash risk. The mechanism analysis shows that state control reduces stock price crash risk through the implementation of conservative corporate policies. Furthermore, the impact of state control is more pronounced with more intensive state involvement, e.g. in strategic industries and when a company's ultimate controller is a non-corporate government agency or the central government.

Originality/value

This paper enriches the literature on the controversy of the role of state control and the results of this study highlight the importance of the conservatism of state control on reducing stock return tail risk. The authors also add to the literature on the importance of the policy-risk sharing effect of state ownership.

Citation

Xie, F., Anderson, H.D., Chi, J. and Liao, J. (2023), "State control and stock price crash risk: new evidence of the conservatism of state-owned enterprises", International Journal of Managerial Finance, Vol. 19 No. 4, pp. 853-889. https://doi.org/10.1108/IJMF-08-2021-0373