The Effect of Political Connection on Stock Price Crash Risk

Abstract

Abstract: The 2008 global financial crisis stimulated the research interest in stock price crash risk. It is of great theoretical and practical significance to analyze the determinants of stock price crash risk. However, the determinants of stock price crash risk are still unclear, especially in transition economies. Much less explored are from the perspective of informal institutions, such as political connection, which is very common around the world and has important effect on firm decision making. Using a firm-level dataset of Chinese listed companies over the period of 2007-2015, this paper studies the influence of political connection on stock price crash risk and the difference of above effect under different profitability and financial development level. The results show:The private company's political connection is more in line with the resource dependent theory. Political connection alleviates firm manager's incentive to hide bad news, and thereby potentially reduces stock price crash risk of private companies. The stronger the political connection degree, the more obvious of the inhibitory effect on stock price crash risk. The influence of political connection is restrained by company characteristics and external institutional environments. The influence of political connection on stock price crash risk is relatively more obvious in companies with poorer profitability and regions with lower financial development. The influence of the political connection on stock price crash risk in state-owned enterprises is not significant. It has important implications for us to recognize the value of political connection and reduce the stock price crash risk.

Key words: stock price crash risk, political connection, financial development, profitability

Su Kun. The Effect of Political Connection on Stock Price Crash Risk[J]. Management Review, 2021, 33(7): 54-67.

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