Do confucianism and political connections affect stock price crash risk: evidence from Chinese economy?

ABSTRACT

Utilizing a large dataset on Chinese A-Share listed firms comprising 18763 firm-year observation for the period of 2001–2015, we examined whether Confucianism and political connections lessen the stock price crash risk of firms by using geographical-proximity-based Confucianism variables. Our findings point towards the evidence that firms situated in China with higher levels of Confucianism reveal low levels of stock price crash risk and this relationship is incrementally significant for politically connected firms while controlling for a battery of control variables. Our results are robust by using alternate proxies.

KEYWORDS:

• Confucianism
• political connections
• stock price crash risk
• China

JEL CLASSIFICATION:

• G30
• P10

Acknowledgments

This research is supported by grants from, the National Science Foundation of China(NSFC) for Distinguished Youth Scholars (No. 71225002) and the National NaturalScience Foundation of China (No. 71401067).

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Also, look at the studies of (Jin and Myers 2006; Hutton, Marcus, and Tehranian 2009) which empirically tested and concurred with the notion that managerial bad news hoarding leads to higher rate of stock price crash risk.

² For detailed construction of the CONFM variable please consult the work of Du (2015) which elaborated the stepwise calculation of the geographic proximity measure.

³ We calculate the CONFM variable for all the main seven national Confucianism centres and use each of them for the estimation model mentioned in equation (5).