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Excess perks and stock price crash risk: Evidence from China

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  • Xu, Nianhang
  • Li, Xiaorong
  • Yuan, Qingbo
  • Chan, Kam C.

Abstract

We investigate the impact of excess perk consumption on crash risk in state-owned enterprises in China. To enjoy excess perks, executives in state-owned enterprises have an incentive to withhold bad news for extended periods, leading to higher future stock price crash risk. Consistent with this assertion, we find a positive correlation between excess perks and crash risk. The findings are robust to the inclusion of other determinants of crash risk identified in the literature, such as earnings management, conditional conservatism, and firm-level corporate governance mechanisms. The results still hold after accounting for possible endogeneity issues using a two-stage least squares estimation. Earnings management (conditional conservatism) helps amplify (lessen) this impact. Moreover, better external monitoring mitigates the impact of excess perks on firm crash risk. We further find that the impact of excess perks on crash risk is more pronounced in firms whose executives are approaching retirement and persists for at least two years.

Suggested Citation

  • Xu, Nianhang & Li, Xiaorong & Yuan, Qingbo & Chan, Kam C., 2014. "Excess perks and stock price crash risk: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 419-434.
    • Handle: RePEc:eee:corfin:v:25:y:2014:i:c:p:419-434
    DOI: 10.1016/j.jcorpfin.2014.01.006
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    More about this item

    Keywords

    Excess perks; Crash risk; Bad news hoarding; External monitoring;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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