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The benefit of being a local leader: Evidence from firm-specific stock price crash risk

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  • Xu, Limin
  • Yu, Chia-Feng (Jeffrey)
  • Zurbruegg, Ralf

Abstract

This paper investigates whether being a local leader affects a firm's stock price crash risk. We find that local leadership, in terms of being a relatively large firm in a surrounding locality, decreases a firm's stock price crash risk. The results are robust to both an instrumental variable and a difference-in-differences regression approach. We also document that the impact on crash risk depends on the extent to which local communities are likely to be monitoring local firms through their stock market participation rates, the information environment surrounding these firms, and the level of industry competition. Overall, our results highlight a novel benefit of being a local leader, as it is associated with a higher level of local monitoring which renders the firm less prone to crash risk.

Suggested Citation

  • Xu, Limin & Yu, Chia-Feng (Jeffrey) & Zurbruegg, Ralf, 2020. "The benefit of being a local leader: Evidence from firm-specific stock price crash risk," Journal of Corporate Finance, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:corfin:v:65:y:2020:i:c:s0929119920301966
    DOI: 10.1016/j.jcorpfin.2020.101752
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    2. Xiao, Jihong & Chen, Xian & Li, Yang & Wen, Fenghua, 2022. "Oil price uncertainty and stock price crash risk: Evidence from China," Energy Economics, Elsevier, vol. 112(C).
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    More about this item

    Keywords

    Local bias; Local monitoring; Local leader; Firm-specific stock price crash risk; Earnings management;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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