Building an open and stable capital market: a supervision intensity perspective

Abstract

This article investigates the impact of supervision intensity on stock price crash risk (SPCR) in China. A firm’s decision to hide bad news lies in the trade-off between the benefits of violation and the costs of being punished by government regulations. Our research findings reveal an inverted U-shaped relationship between SPCR and supervision intensity. Institutional shareholding strengthens the inverted U-shaped relationship between supervision intensity and SPCR through the mediating effect. This inverted U-shaped relationship is even more sensitive in low transparency firms. Better local market conditions and external auditing seemingly enhance supervision effectiveness, and hence mitigate SPCR. This article also discusses the supervision of other developed countries, such as the USA, Japan, and the UK, as well as other historical evidence to further inform the design of open and stable capital markets, particularly in the Chinese context.

Keywords:

• Stock price crash risk
• supervision intensity
• institutional shareholding
• marketization

JEL Code:

• G32
• G38
• G41

Availability of data and materials

The datasets generated and analyzed during the current study are available in the CNKI’ score newspaper full-text database [www.cnki.net] and China Stock Market and Accounting Research repository [https://www.gtarsc.com/].

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Xi, J.P., 2017. The Communist Party of China's 19th CPC National Congress work report. People's Publishing House.

2 http://www.csrc.gov.cn/pub/newsite/zjhxwfb/xwdd/201812/t20181224_348626.html

3 The company is in a spoiled financial status, with losses for at least two consecutive years.

4 Articles on ‘deregulation’ are collected from four major newspapers from January 1, 2009 to December 31, 2021, and all are read and it is found that most articles add negative words in front of ‘deregulation’ to indicate the need to strengthen supervision. Only a few articles explicitly explore the general meaning of deregulation. They did not fundamentally have any bearing on the regulatory indicators Sup1 and Sup2 (see Eqs. (4)–(5) for details), so a number of articles purely exploring the theme of deregulation are removed from the original data collected.

5 SV1 equals the average of ratio 1 of the four Chinese major securities newspapers, and SV2 equals the average of ratio 2 of the four Chinese major securities newspapers.

6 The data is from China Stock Market and Accounting Research database (CSMAR). We take the natural logarithm of GDP per capita as the instrumental variable in our test.

7 The anti-crime effort is measured by the natural logarithm of the number of people arrested for criminal cases per year in the province. The number of people arrested in criminal cases in each province is manually collected from the annual work report of the people's Procuratorate issued by each province.

8 The data is from China Statistical Yearbook, and the higher education rate is measured by the proportion of people with bachelor's degree or above in the total population over 6 years old in each province.

9 https://www.federalreserve.gov/newsevents/testimony/braunstein20090429a.htm.

10 NERI means National Economic Research Institute.

Additional information

Funding

This article is financially supported by the National Social Science Foundation of China (18ZDA005), the National Natural Science Foundation of China (71673033) and the Chinese Ministry of Education (2020CDJSK02ZH02). The authors are solely responsible for any error or omission.

Notes on contributors

Fanjie Fu

Fanjie Fu, Ph.D candidate, School of Economics and Business Administration, Chongqing University, China.

Alan Collins

Alan Collins, Professor of Economics and Public Policy, Nottingham Trent University, Nottingham, UK.

Shujie Yao

Shujie Yao, Senior Chair Professor of Economics, Lianmin Institute of Economic Research, Liaoning University, and School of Economics and Business Administration, Chongqing University.