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Causal Impact of Stock Price Crash Risk on Cost of Equity: Evidence from Chinese Markets

Author

Listed:
  • Babatounde Ifred Paterne Zonon

    (School of Economics and Management, Southwest Jiaotong University, Chengdu 610031, China)

  • Xianzhi Wang

    (Faculty of Arts and Social Sciences, Hong Kong Baptist University, Hong Kong SAR 999077, China)

  • Chuang Chen

    (School of Business, University of New South Wales, Sydney, NSW 2052, Australia)

  • Mouhamed Bayane Bouraima

    (Sichuan College of Architectural Technology, Deyang 618000, China)

Abstract

This study investigates the causal impact of stock price crash risk on the cost of equity (COE) in China’s segmented A- and B-share markets with an emphasis on ownership structures and market regimes. Employing a bootstrap panel Granger causality framework, Markov-switching dynamic regression, and panel threshold regression models, the analysis reveals that heightened crash risk significantly increases COE, with the effects being more pronounced for A-shares because of domestic investors’ heightened risk sensitivity. This relationship further intensifies in bull markets, where investor optimism amplifies downside risk perceptions. Ownership segmentation plays a critical role, as foreign investors in B-shares exhibit weaker reliance on firm-level valuation metrics, favoring broader risk-diversification strategies. These findings offer actionable insights into corporate risk management, investor decision making, and policy formulation in segmented and emerging equity markets.

Suggested Citation

  • Babatounde Ifred Paterne Zonon & Xianzhi Wang & Chuang Chen & Mouhamed Bayane Bouraima, 2025. "Causal Impact of Stock Price Crash Risk on Cost of Equity: Evidence from Chinese Markets," Economies, MDPI, vol. 13(6), pages 1-24, June.
    • Handle: RePEc:gam:jecomi:v:13:y:2025:i:6:p:158-:d:1670557
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    More about this item

    Keywords

    cost of equity; stock price crash risk; causality; bull market; bear market; ; G10; G15; G32;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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