Conclusion
This study investigates the impact of corruption crackdown on firm-specific crash risk. Using data of corruption prosecution cases of municipal-level officials in China, we find that firms located in corrupted regions experience a significant decrease in crash risk in the years after the crackdown. Our empirical results suggest that the crackdown on corrupt government officials disrupts political connections and protections, and reduces political risk as well as impairs the ability and incentive of managers to suppress bad news. Consequently, crash risk in the future becomes smaller. Further analyses show that our results are stronger for firms with closer political dependency on local governments and for firms with worse information environment. Finally, using channel tests, we provide direct evidence that crackdown reduces future crash risk by lowering political risk and curbing bad news hoarding. Our empirical results are also robust to a battery of sensitivity checks. To sum up, our evidence suggests that crackdown on political corruption reduces future stock price crash risk and contributes to the stability of the stock market.
