IDEAS home Printed from https://ideas.repec.org/a/eee/riibaf/v51y2020ics0275531919308128.html
   My bibliography  Save this article

Economic policy uncertainty and stock price crash risk

Author

Listed:
  • Luo, Yan
  • Zhang, Chenyang

Abstract

We examine the impact of economic policy uncertainty (EPU) on firm-specific crash risk. Based on a large sample of Chinese listed firms over the period from 2000 to 2017, we provide empirical evidence that firms are more likely to experience stock price crashes when EPU increases. Cross-sectionally analysis further reveals that the impact of EPU on stock price crash risk is stronger for firms whose returns are more sensitive to EPU. More specifically, young stocks, small stocks, high volatility stocks, and growth stocks, which have higher valuation uncertainty per se, are more sensitive to EPU and are more affected by EPU in terms of crash risk. We further show that EPU is significantly and positively associated with aggregated stock price crash risk at the market level.

Suggested Citation

  • Luo, Yan & Zhang, Chenyang, 2020. "Economic policy uncertainty and stock price crash risk," Research in International Business and Finance, Elsevier, vol. 51(C).
    • Handle: RePEc:eee:riibaf:v:51:y:2020:i:c:s0275531919308128
    DOI: 10.1016/j.ribaf.2019.101112
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0275531919308128
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ribaf.2019.101112?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Alexander Bleck & Xuewen Liu, 2007. "Market Transparency and the Accounting Regime," Journal of Accounting Research, Wiley Blackwell, vol. 45(2), pages 229-256, May.
    2. Jin, Li & Myers, Stewart C., 2006. "R2 around the world: New theory and new tests," Journal of Financial Economics, Elsevier, vol. 79(2), pages 257-292, February.
    3. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, August.
    4. Pástor, Ľuboš & Veronesi, Pietro, 2013. "Political uncertainty and risk premia," Journal of Financial Economics, Elsevier, vol. 110(3), pages 520-545.
    5. Çolak, Gönül & Durnev, Art & Qian, Yiming, 2017. "Political Uncertainty and IPO Activity: Evidence from U.S. Gubernatorial Elections," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(6), pages 2523-2564, December.
    6. Lubos Pástor & Pietro Veronesi, 2012. "Uncertainty about Government Policy and Stock Prices," Journal of Finance, American Finance Association, vol. 67(4), pages 1219-1264, August.
    7. Chen, Joseph & Hong, Harrison & Stein, Jeremy C., 2001. "Forecasting crashes: trading volume, past returns, and conditional skewness in stock prices," Journal of Financial Economics, Elsevier, vol. 61(3), pages 345-381, September.
    8. Bialkowski, Jedrzej & Gottschalk, Katrin & Wisniewski, Tomasz Piotr, 2008. "Stock market volatility around national elections," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1941-1953, September.
    9. Malcolm Baker & Jeffrey Wurgler, 2007. "Investor Sentiment in the Stock Market," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 129-152, Spring.
    10. Ray Ball, 2009. "Market and Political/Regulatory Perspectives on the Recent Accounting Scandals," Journal of Accounting Research, Wiley Blackwell, vol. 47(2), pages 277-323, May.
    11. Jeong†Bon Kim & Liandong Zhang, 2016. "Accounting Conservatism and Stock Price Crash Risk: Firm†level Evidence," Contemporary Accounting Research, John Wiley & Sons, vol. 33(1), pages 412-441, March.
    12. Swee‐Sum Lam & Huiping Zhang & Weina Zhang, 2020. "Does Policy Instability Matter for International Equity Markets?," International Review of Finance, International Review of Finance Ltd., vol. 20(1), pages 155-196, March.
    13. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1593-1636.
    14. Ben S. Bernanke, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(1), pages 85-106.
    15. Brandon Julio & Youngsuk Yook, 2012. "Political Uncertainty and Corporate Investment Cycles," Journal of Finance, American Finance Association, vol. 67(1), pages 45-84, February.
    16. Jonathan Brogaard & Andrew Detzel, 2015. "The Asset-Pricing Implications of Government Economic Policy Uncertainty," Management Science, INFORMS, vol. 61(1), pages 3-18, January.
    17. Kim, Jeong-Bon & Li, Yinghua & Zhang, Liandong, 2011. "Corporate tax avoidance and stock price crash risk: Firm-level analysis," Journal of Financial Economics, Elsevier, vol. 100(3), pages 639-662, June.
    18. Jian Chen & Fuwei Jiang & Guoshi Tong, 2017. "Economic policy uncertainty in China and stock market expected returns," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(5), pages 1265-1286, December.
    19. Nick Bloom & Stephen Bond & John Van Reenen, 2007. "Uncertainty and Investment Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(2), pages 391-415.
    20. Leahy, John V & Whited, Toni M, 1996. "The Effect of Uncertainty on Investment: Some Stylized Facts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 64-83, February.
    21. Hutton, Amy P. & Marcus, Alan J. & Tehranian, Hassan, 2009. "Opaque financial reports, R2, and crash risk," Journal of Financial Economics, Elsevier, vol. 94(1), pages 67-86, October.
    22. Li, Xiao-Ming, 2017. "New evidence on economic policy uncertainty and equity premium," Pacific-Basin Finance Journal, Elsevier, vol. 46(PA), pages 41-56.
    23. Rodrik, Dani, 1991. "Policy uncertainty and private investment in developing countries," Journal of Development Economics, Elsevier, vol. 36(2), pages 229-242, October.
    24. Xuejun Jin & Ziqing Chen & Xiaolan Yang, 2019. "Economic policy uncertainty and stock price crash risk," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(5), pages 1291-1318, March.
    25. S. P. Kothari & Susan Shu & Peter D. Wysocki, 2009. "Do Managers Withhold Bad News?," Journal of Accounting Research, Wiley Blackwell, vol. 47(1), pages 241-276, March.
    26. Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2005. "The economic implications of corporate financial reporting," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 3-73, December.
    27. Bryan Kelly & Ľuboš Pástor & Pietro Veronesi, 2016. "The Price of Political Uncertainty: Theory and Evidence from the Option Market," Journal of Finance, American Finance Association, vol. 71(5), pages 2417-2480, October.
    28. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, May.
    29. Kim, Jeong-Bon & Li, Yinghua & Zhang, Liandong, 2011. "CFOs versus CEOs: Equity incentives and crashes," Journal of Financial Economics, Elsevier, vol. 101(3), pages 713-730, September.
    30. Joseph D. Piotroski & T. J. Wong & Tianyu Zhang, 2015. "Political Incentives to Suppress Negative Information: Evidence from Chinese Listed Firms," Journal of Accounting Research, Wiley Blackwell, vol. 53(2), pages 405-459, May.
    31. Nagar, Venky & Schoenfeld, Jordan & Wellman, Laura, 2019. "The effect of economic policy uncertainty on investor information asymmetry and management disclosures," Journal of Accounting and Economics, Elsevier, vol. 67(1), pages 36-57.
    32. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    33. Jens, Candace E., 2017. "Political uncertainty and investment: Causal evidence from U.S. gubernatorial elections," Journal of Financial Economics, Elsevier, vol. 124(3), pages 563-579.
    34. Callen, Jeffrey L. & Fang, Xiaohua, 2013. "Institutional investor stability and crash risk: Monitoring versus short-termism?," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3047-3063.
    35. Maria Boutchkova & Hitesh Doshi & Art Durnev & Alexander Molchanov, 2012. "Precarious Politics and Return Volatility," Review of Financial Studies, Society for Financial Studies, vol. 25(4), pages 1111-1154.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kwabi, Frank Obenpong & Boateng, Agyenim & Wonu, Chizindu & Kariuki, Charles & Du, Anna, 2023. "Political uncertainty and cross-border equity portfolio allocation decisions: International evidence," International Review of Financial Analysis, Elsevier, vol. 87(C).
    2. Li, Qingyuan & Li, Si & Xu, Li, 2018. "National elections and tail risk: International evidence," Journal of Banking & Finance, Elsevier, vol. 88(C), pages 113-128.
    3. Al-Thaqeb, Saud Asaad & Algharabali, Barrak Ghanim, 2019. "Economic policy uncertainty: A literature review," The Journal of Economic Asymmetries, Elsevier, vol. 20(C).
    4. Yuan, Mengyi & Zhang, Lin & Lian, Yonghui, 2022. "Economic policy uncertainty and stock price crash risk of commercial banks: Evidence from China," Economic Analysis and Policy, Elsevier, vol. 74(C), pages 587-605.
    5. Afzali, Mansoor & Ҫolak, Gönül & Fu, Mengchuan, 2021. "Economic uncertainty and corruption: Evidence from public and private firms," Journal of Financial Stability, Elsevier, vol. 57(C).
    6. Xu, Zhaoxia, 2020. "Economic policy uncertainty, cost of capital, and corporate innovation," Journal of Banking & Finance, Elsevier, vol. 111(C).
    7. Chahine, Salim & Daher, Mai & Saade, Samer, 2021. "Doing good in periods of high uncertainty: Economic policy uncertainty, corporate social responsibility, and analyst forecast error," Journal of Financial Stability, Elsevier, vol. 56(C).
    8. Hou, Canran & Liu, Huan, 2023. "Institutional cross-ownership and stock price crash risk," Research in International Business and Finance, Elsevier, vol. 65(C).
    9. Cheng, Mengyao, 2022. "Legislative gridlock and stock return dispersion around roll-call votes," Journal of Banking & Finance, Elsevier, vol. 138(C).
    10. Saud Asaad Al‐Thaqeb & Barrak Ghanim Algharabali & Khaled Tareq Alabdulghafour, 2022. "The pandemic and economic policy uncertainty," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 2784-2794, July.
    11. Min Jung Kang & Y. Han (Andy) Kim & Qunfeng Liao, 2020. "Do bankers on the board reduce crash risk?," European Financial Management, European Financial Management Association, vol. 26(3), pages 684-723, June.
    12. Jens, Candace E., 2017. "Political uncertainty and investment: Causal evidence from U.S. gubernatorial elections," Journal of Financial Economics, Elsevier, vol. 124(3), pages 563-579.
    13. Zaman, Rashid & Atawnah, Nader & Haseeb, Muhammad & Nadeem, Muhammad & Irfan, Saadia, 2021. "Does corporate eco-innovation affect stock price crash risk?," The British Accounting Review, Elsevier, vol. 53(5).
    14. Tran, Quoc Trung, 2021. "Economic policy uncertainty and cost of debt financing: International evidence," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    15. Theodora Bermpei & Antonios Nikolaos Kalyvas & Lorenzo Neri & Antonella Russo, 2022. "Does economic policy uncertainty matter for financial reporting quality? Evidence from the United States," Review of Quantitative Finance and Accounting, Springer, vol. 58(2), pages 795-845, February.
    16. Qiankun Gu & Jeong‐Bon Kim & Ke Liao & Yi Si, 2023. "Decentralising for local information? Evidence from state‐owned listed firms in China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(5), pages 5245-5276, December.
    17. Peng, Daoju & Colak, Gonul & Shen, Jianfu, 2023. "Lean against the wind: The effect of policy uncertainty on a firm's corporate social responsibility strategy," Journal of Corporate Finance, Elsevier, vol. 79(C).
    18. Chen, Yunsen & Xie, Yuan & You, Hong & Zhang, Yanan, 2018. "Does crackdown on corruption reduce stock price crash risk? Evidence from China," Journal of Corporate Finance, Elsevier, vol. 51(C), pages 125-141.
    19. Ben-Nasr, Hamdi & Ghouma, Hatem, 2018. "Employee welfare and stock price crash risk," Journal of Corporate Finance, Elsevier, vol. 48(C), pages 700-725.
    20. Bing Wang & Kung‐Cheng Ho & Xinyu Liu & Yan Gu, 2022. "Industry cash flow volatility and stock price crash risk," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(2), pages 356-371, March.

    More about this item

    Keywords

    Economic policy uncertainty; Stock price crash risk;

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:riibaf:v:51:y:2020:i:c:s0275531919308128. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ribaf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.