Mechanisms Underlying Geopolitical Shocks and Stock Price Crash Risk: Evidence from China

ABSTRACT

Geopolitical uncertainty imposes a significant impact on stock prices in the stock market. We construct dynamic estimations of geopolitical risk exposure of individual stocks listed in China and examine the relationship between individual geopolitical risk and future stock price crash risk. Our results show that geopolitical risk is a more prominent macro factor than economic policy uncertainty measure that affects stock price crash risk. Investigating the underlying mechanism, we find that firms with highly synchronized stock prices, low analyst coverage ratio, low institutional holdings, and large investor heterogeneity tend to be affected more by geopolitical shocks, leading to future stock price crashes. This study shows the importance of promoting efficient information transmission system and improving corporate governance.

KEYWORDS:

• Geopolitical risk
• stock price crash risk
• corporate governance
• information asymmetry

JEL:

• D80
• H56
• G12
• G14

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

 Wenjie Ding would like to thank the Young Scientists Fund of the National Natural Science Foundation of China [Grant No. 72203244] for funding this research. Fangzhao Zhou would like to thank the Humanities and Social Science fund of the Chinese Ministry of Education [Grant No. 20YJA790095] for funding this research.