Review of Quantitative Finance and Accounting

, Volume 48, Issue 3, pp 643–676 | Cite as

Do political connections affect stock price crash risk? Firm-level evidence from China

Original Research

Abstract

Using a sample of Chinese listed firms in the period from 2003 to 2012, this paper empirically investigates how the presence of politically connected directors affects stock price crash risk. We thereby make a distinction between listed state-controlled firms and privately controlled firms due to their different incentives to appoint politicians as directors on the board. Our empirical results show that politically connected directors exacerbate stock price crash risk in listed state-controlled firms, an effect driven by the appointment of local government officials as directors. In contrast, hiring politicians as directors, particularly central-government-affiliated directors, helps listed privately controlled firms to reduce stock price crash risk. Finally, good quality of institutions does not help to alleviate the positive relationship between political connections and stock price crash risk in listed state-controlled firms. However, it does weaken the role of political connections in reducing crash risk in listed privately controlled firms.

Keywords

Political connection Crash risk Ownership Financial opacity Quality of institutions 

JEL Classifications

G14 G38 K42 

Notes

Acknowledgments

The authors would like to thank the editor and three anonymous reviewers for suggestions that substantially improved the article. We also would like to thank Chin Man Chu, Wenzhou Qu, Terry Walter, Ji George Wu, and participants in the 2014 International Conference on Corporate Finance and Capital Market (Hangzhou) for their suggestions and comments on an earlier draft of this article. Lihong Wang acknowledges the National Natural Science Foundation of China (NSFC-71302072) and the Research Funds for Outstanding Youth Scholars in Fujian, China (0155-Z0210502) for financial support.

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Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  1. 1.Nanyang Business SchoolNanyang Technological UniversitySingaporeSingapore
  2. 2.Institute for Financial and Accounting StudiesXiamen UniversityXiamenChina

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