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The stock price crash risk of central firms in business groups

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  • Jia, Qinmin
  • Song, Zhihui
  • Huang, Xiaohong
  • Xuan, Quansheng

Abstract

The ultimate owner of a business group typically exercises control over the group through a few central firms. We argue that group owners have a strong incentive to protect central firms from stock price crash to avoid losing control power. Using a novel, purpose-built database on the ownership structures of Chinese business groups, we analyze a large sample of Chinese listed firms spanning 2007–2019. We find that central firms experience significantly lower stock price crash risk compared with peripheral firms. The results are robust to series of robustness tests, including controlling for additional variables and fixed effects, alternative measures of centrality, falsification tests, and an alternative research design. Heterogeneity analyses indicate that the decrease in crash risk is more pronounced in firms with higher subsidiary values, firms with greater share pledging, and increased involvement in related-party transactions. Moreover, our results are robust across different types of ultimate owners. Our findings suggest that protecting central firms from crash risk is an inherent characteristic of business groups, and this protective behavior may be linked to related-party transactions.

Suggested Citation

  • Jia, Qinmin & Song, Zhihui & Huang, Xiaohong & Xuan, Quansheng, 2025. "The stock price crash risk of central firms in business groups," International Review of Financial Analysis, Elsevier, vol. 105(C).
    • Handle: RePEc:eee:finana:v:105:y:2025:i:c:s1057521925005204
    DOI: 10.1016/j.irfa.2025.104433
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    Keywords

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    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
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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