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Does non-punitive regulation diminish stock price crash risk?

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  • Lu, Jing
  • Qiu, Yuhang

Abstract

This study investigates the impact of non-punitive regulation on stock price crash risk. We use the inquiry letter issued by the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE) in China as a proxy for non-punitive regulation. The results demonstrate that stock price crash risk decreases after the issuance of the inquiry letter. The reduction in crash risk is more pronounced for firms receiving a more detailed inquiry letter (or an inquiry letter requiring intermediary agencies to provide professional opinions) and for those that have more incentives or are more easily able to conceal bad news. The firm's response to the corresponding inquiry letter reduces crash risk. Furthermore, the impact of the inquiry letter on reducing crash risk is short-term, not long-term. These results indicate that the inquiry letter reduces crash risk by playing its information discovery role.

Suggested Citation

  • Lu, Jing & Qiu, Yuhang, 2023. "Does non-punitive regulation diminish stock price crash risk?," Journal of Banking & Finance, Elsevier, vol. 148(C).
    • Handle: RePEc:eee:jbfina:v:148:y:2023:i:c:s0378426622003119
    DOI: 10.1016/j.jbankfin.2022.106731
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    2. Li, Ziyang & Chen, Yanjun & Li, Yanlin, 2023. "Top management abnormal turnover and stock price crash risk: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 89(C).
    3. Tang, Qi, 2023. "Labor cost and stock price crash risk: Evidence from China," Finance Research Letters, Elsevier, vol. 55(PB).

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    More about this item

    Keywords

    Inquiry letter; Crash risk; Information asymmetry; Non-punitive regulation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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