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Local Economic Performance, Political Promotion, and Stock Price Crash Risk: Evidence from China

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  • Qian Li
  • Mengting Guo

Abstract

This paper explores the association between promotion pressure on local officials and the risk of stock price crashes in China. Using local economic development data, we construct an index of performance pressure on local officials. Using data from 195 Chinese cities and 1,101 listed firms in those cities during 2006–2018, we find that performance pressure is negatively associated with the stock price crash risk. However, the negative association only exists for state-owned firms and is stronger for local officials with higher ex-ante promotion probability and those promoted after their current tenures. We also find that earnings management and over-investment are the underlying channels through which performance pressure affects crash risk. Our findings imply that the top-down assessment system for local officials in China has economic consequences for local firms.

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  • Qian Li & Mengting Guo, 2021. "Local Economic Performance, Political Promotion, and Stock Price Crash Risk: Evidence from China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 57(15), pages 4330-4349, December.
    • Handle: RePEc:mes:emfitr:v:57:y:2021:i:15:p:4330-4349
    DOI: 10.1080/1540496X.2020.1809373
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    Cited by:

    1. Wang, Chih-Wei & Lee, Chien-Chiang & Wu, Lin-Tan, 2023. "The relationship between cash flow uncertainty and extreme risk: International evidence," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    2. Zhang, Tianjiao & Shen, Zhe & Sun, Qian, 2022. "Product market advertising and stock price crash risk," Pacific-Basin Finance Journal, Elsevier, vol. 71(C).

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