8. Conclusion
Using a large sample of Chinese firms for the period 2008-2013, we provide strong and robust evidence that corporate political connections are negatively associated with firm-specific stock price crash risk. This finding is consistent with the following view: political connections help companies to ease financing constraints and reduce bad news hoarding activities. Moreover, we show that the negative relationship between political connections and stock price crash risk is weaker either when firm’s senior executives are still in politics or companies are in high financial transparency of local governments. In our analysis of the impact mechanism, we find that political connections can increase the rate at which firms react to bad news, thereby curbing the risk of a share price crash.
This paper has important theoretical and practical significance. In theory, this paper first examines the political connections from the perspective of the stock price crash risk. Political connection as a typical way of informal institutional arrangement against the background of the transition of China’s economic system transition is widespread, and research into political associations is of great significance. This research has not only enriched the literature on political connections but also deepened the understanding of stock price crash risk. On the practical significance, the stock price crash risk serious damage to the capital market development. This paper provides a new approach for stakeholders and regulators to predict the stock price crash risk through strengthening the supervision of enterprises’ bad news. At the same time, this paper argues that executives’ personal experiences have an effect on their information disclosure behavior, so it is necessary to identify information disclosure report.
