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Labor protection and stock price crash risk: Evidence from international equity markets

Author

Listed:
  • Chen, Wei
  • Dai, Lili
  • Fang, Xiaohua
  • Zhang, Wenjun

Abstract

We utilize the exogenous intertemporal variation in employment protection across countries and study the impact of employment protection on international equity markets. We find robust evidence that firms located in countries with weak labor protection regulation exhibit a low level of one-year-ahead stock price crash risks relative to those in countries with strong labor protection regulation. It is consistent with the view that when employees face material unemployment risk, they are more incentivized to engage in information search and analysis, thereby curtailing the effectiveness of managerial bad news hoarding activities (i.e., the protection heightening risk hypothesis). Our findings are robust to a battery of sensitivity tests. Further evidence shows that the impact of employment protection on crash risk is more pronounced for firms with a higher proclivity to suppress bad news and for firms in countries with stronger legal enforcement. Our findings have important implications for policymakers concerning equity extreme risk and labor protection around the globe.

Suggested Citation

  • Chen, Wei & Dai, Lili & Fang, Xiaohua & Zhang, Wenjun, 2025. "Labor protection and stock price crash risk: Evidence from international equity markets," The British Accounting Review, Elsevier, vol. 57(3).
    • Handle: RePEc:eee:bracre:v:57:y:2025:i:3:s0890838923001312
    DOI: 10.1016/j.bar.2023.101274
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    More about this item

    Keywords

    Labor protection; Crash risk; International evidence;
    All these keywords.

    JEL classification:

    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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