Product market competition, corporate governance and stock price crash risk: Evidence from China

ABSTRACT

We investigate the relationship between product market competition and internal corporate governance from the perspective of stock price crash risk using a sample of Chinese A-share listed firms from 2003 to 2014. We find that product market competition significantly decreases stock price crash risk and this effect is more pronounced for firms with poor corporate governance (i.e. state-owned enterprises (SOEs), firms with remote independent directors, and firms with lower managerial ownership). This pattern of evidence suggests that product market competition, as an external governance mechanism can substitute poor internal corporate governance by disciplining insiders’ information hoarding and thus lead to lower stock price crash risk. The further finding that market competition improves information quality supports the information hoarding channel. Our findings hold up to a battery of robustness checks and endogeneity tests.

KEYWORDS:

• Product market competition
• corporate governance
• stock price crash risk
• information quality

JEL CLASSIFICATION:

• G14
• G34

Acknowledgements

This work was supported by the National Natural Science Foundation of China [72202035 ,72073024]; Ministry of Education of the People's Republic of China Humanities and Social Sciences Youth Foundation [22YJC630099]; “the Fundamental Research Funds for the Central Universities” in UIBE [19QD02]; and the Innovation Engineering Laboratory of the International Business School of the University of International Business and Economics under Grant 102/78220301. All the authors contribute equally.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The sample ends in 2014 as China’s stock market experienced a stock crash in 2015 and using sample before 2015 can provide cleaner evidence.

Additional information

Funding

 The work was supported by the National Natural Science Foundation of China [72202035, 72073024]; Ministry of Education of the People's Republic of China Humanities and Social Sciences Youth Foundation [22YJC630099]; Fundamental Research Funds for the Central Universities in UIBE [19QD02]; the Innovation Engineering Laboratory of the International Business School of the University of International Business and Economics [102/78220301].