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We revisit the research question centering around the impact of the market for corporate control on stock price crash risk. Using a newly-developed takeover index from Cain, McKeon, and Solomon (2017) that comprehensively considers existing state takeover laws, federal statutes, and state court standards of review along with a list of firm-specific and economic variables, we find external takeover susceptibility reduces firms’ future stock price crash risk. This evidence is consistent with a recent cross-country study but contradicts another U.S.-based study, confirming the importance of considering existing takeover provisions when studying any single anti-takeover law on a firm’s takeover protection. Our results are robust to alternative measures of stock price crash risk and address multiple critiques of prior studies on takeover susceptibility. Our analysis further suggests that external takeover susceptibility reduces crash risk by constraining a CEO’s use of manipulative accounting techniques to hide bad news. Overall, our findings confirm that the market for corporate control is an effective governance mechanism in reducing information-hoarding related agency problems.

Exploiting the staggered implementation of the EDGAR system from 1993 to 1996 as exogenous shocks to information dissemination technologies, we document that faster dissemination of corporate disclosures through the internet increases firms’ future stock price crash risk. These results are robust to alternative sample constructions, measures of crash risk, and fixed effects. Supplemental evidence suggests two channels: an increase in stock liquidity and an increase in investors’ reliance on public disclosure, both of which exacerbate managers’ incentives to withhold bad news. Overall, our findings suggest that modern information technology may have an unintended effect on managers’ bad news hoarding behavior.

Institutional investors’ common blockholdings within an industry produce an information advantage, allowing them to differentiate between the industry-wide and firm-specific nature of bad news released by peer firms and avoiding selling on false spillover signals (i.e., “panic exit”), which in turn reduces future stock price crash risk. This evidence is in sharp contrast with the evidence that total institutional ownership increases firm-level stock price crash risk. Our study highlights the economic value of common owners in the stock markets: Their information advantage provides a stabilizing effect against contagion.

We employ a difference-in-differences estimation approach to examine the impact of stakeholder orientation on corporate payout policy. The empirical test exploits the enactment of US state-level constituency statutes, which allow directors to consider stakeholders and long-term interests in corporate decision making. We find that firms incorporated in states that have adopted constituency statutes significantly reduce share repurchases, whereas the effects of statute enactment on total payout and dividend payments are marginal and insignificant, respectively. We further show that the negative statute effect on share repurchases is more pronounced for firms that are in financial distress or are close to default, and firms in consumer-focused and high-polluting industries. Overall, our findings indicate that promoting stakeholder orientation can have a significant impact on corporate payout decisions.

In this study, we examine the relationship between job satisfaction and firm leverage using a sample of Chinese listed firms. We find that in a sample of “China’s 100 Best Employers Award” winners during 2011–2017, job satisfaction is negatively associated with firm leverage. The effect is more pronounced in firms with higher distress risk and operating in human capital intensive industries. We confirm the validity of the main findings using a matched sample and a series of robustness checks. Overall, our results indicate that firms can credibly demonstrate their commitment to stakeholders and re-shape their capital structure by improving job satisfaction.

We document that the strengthening of creditor rights after the staggered adoption of anti-recharacterization laws across U.S. states leads to reductions in the cost of equity capital. This effect is more pronounced among firms that are financially constrained, distressed, have more growth opportunities, and weaker corporate governance. We further find that the adoption of such laws directly lowers information asymmetry, firm risk, and leads to a more dispersed debt structure. Overall, the results suggest that strengthened creditor rights improve shareholder value through increased borrowing capacity and creditor monitoring.

Recent anecdotal evidence suggests that high litigation risk may induce firms to cut dividends. By comparison, litigation can be an effective governance tool for shareholders to force firms to distribute cash. Therefore, it is unclear how litigation risk affects dividend payouts on average. To address this issue, we exploit the staggered adoption of universal demand (UD) laws across various U.S. states as quasi-exogenous shocks. We find that firms increase dividend payouts significantly after UD laws raise the hurdle of filing derivative lawsuits. In particular, the adoption of UD laws discourages the emission of cash dividends while encourages the initiation of share repurchases. The main effect is more pronounced for firms faced with higher litigation risk, that are more financially distressed, and operating in more competitive product markets. Our overall findings suggest that excessive threats of derivative lawsuits may dampen financial flexibility and deter the distribution of cash to shareholders.

We propose a behavioral dividend clientele view to explain a unique “ex-dividend day” anomaly on the Chinese stock market. In particular, we find that on the ex-dividend day, the average CAPM-adjusted stock return is significantly below zero and the average trading volume significantly shrinks, which are different from the theoretical predictions and existing findings drawn from other stock markets. Such patterns tend to be driven by small retail investors who are net buyers of dividend paying stocks prior to the ex-dividend day and switch to net sellers of on and after the ex-dividend day. Furthermore, we find “dividend price”, the negative deviations of ex-dividend day stock return from zero, is positively associated with dividend yields and the idiosyncratic risks of the underlying stocks. These findings suggest that investors with strong non-monetary and psychologically driven dividend preferences can result in a unique “ex-dividend day” anomaly.

A recent reform in China, the Shanghai-Hong Kong Stock Connect program, made a subset of Chinese stocks investable for foreign investors, thus partially opening China’s stock market. We use this reform to examine the quantity and quality effects of stock market liberalization on corporate investment and address some of the data and methodological concerns raised in previous studies. Our difference-in-differences analysis shows that the reform boosts the investment of investable firms relative to non-investable firms. It also makes the investable firms’ investment more responsive to growth opportunities, increases their total factor productivity, and improves their operating performance. Further analysis finds that the reform increases equity issuance, reduces agency costs, and mitigates earnings management, which helps explain its quantity and quality effects on corporate investment.

Under probability weighting, entrepreneurs’ skewness preference, the tendency to seek right-skewed and avoid left-skewed risks, can affect the negative skewness of stock prices Based on the evidence after the outbreak of Severe Acute Respiratory Syndrome (SARS), which is caused by the same family of viruses as COVID-19, we show that firms managed by CEOs who previously experienced the outbreak of SARS during their tenure of high executives have lower stock price crash risk measured by negative skewness Among those firms, this effect especially matters for CEOs that actually experienced prominent operating distress or stock price crashes during the outbreak of SARS In addition, firms managed by CEOs with professional epidemic experience tend to disclose bad news in a timelier manner, and have lower discretionary accruals Our overall evidence indicates that entrepreneurs with imprinted professional epidemic experience may overweight the probability of extreme tail events As a result, they intentionally avoid stock price crashes through preventing the formation and accumulation of bad news

In this paper, we demonstrate that the mandatory disclosure of data breaches may have an unintended consequence: the distortion of firms’ real business activities. We employ the staggered adoption of data breach disclosure laws across various U.S. states to show that such mandatory disclosure exacerbates firms’ real earnings manipulation multidimensional through twisting production costs, discretionary expenses, and cash flow from operations. The main effect is more pronounced for firms of which the outbreak of data breaches is more of a concern and under stronger short-term market pressures. Furthermore, the adoption of such laws is associated with higher stock price crash risk and fewer patenting activities. Overall, our findings reveal possible unintended real effects of certain laws oriented at protecting customers through mitigating information opacity.

Investors tend to litigate large stock price declines, i.e., file “stock-drop lawsuits”. Enterprising plaintiffs’ attorneys seek to take advantage of the stock market declines that have accompanied the COVID-19 outbreak in early 2020 by filing class action lawsuits. However, it is less clear whether the ex-ante threat of security class actions can deter stock price crashes. To address this question, we exploit the 1999 ruling of the Ninth Circuit Court of Appeals that discourages security class actions as a quasi-exogenous shock, and find that reducing the threat of security class actions leads to a significant increase in stock price crash risk. This effect is more pronounced for firms faced with higher litigation risk, with worse earnings quality and weaker monitoring from auditors, and is partially driven by decreased timeliness of bad-news disclosure. Our overall findings highlight the importance of security class actions in constraining bad-news hoarding and maintaining market stability.

This paper presents an empirical examination on how listed nonfinancial firms use one of the most important financial assets, namely, available-for-sale securities, as earnings manipulation tools because of bad-news-hoarding motives. In 2007, China set its first accounting standards for financial instruments, which classify financial assets based on the highly subjective “managerial holding intention” criterion. We find that from 2007 through 2016, the holding of available-for-sale securities is positively associated with the likelihood of stock price crashes for Chinese listed firms. The effect is more pronounced for firms with a CEO who has a finance background, higher information asymmetries, and less effective external monitoring. Our evidence indicates that in typical emerging markets, fair value accounting may have unintended consequences, inducing nonfinancial firms to employ financial assets as tools to hoard bad news.

Using a hand‐collected dataset of city‐level local official turnover in China, I find that average cash holdings of listed firms decrease significantly upon turnover of city heads, and this effect concentrates in privately owned enterprises. Such effects are more pronounced in firms located in cities with lower government quality. I also find that local official turnover leads to decreases in equity issuance for privately owned enterprises but not for state‐owned enterprises, which largely explains our primary findings. Overall, this paper reveals that the cash policy of privately owned enterprises is sensitive to local official turnover in an emerging market.

Using a unique regulatory change (the enactment of the Labor Contract Law) in China, we find that the strengthening of labor protection leads to a significant increase in firm transparency. Further analyses indicate that stronger labor protection reduces operating flexibility, which can exert external pressure on firms and exacerbate managerial short-termism problems. To counteract the unfavorable challenge, shareholders re-contract with managers by granting more equity incentives and less perks. This improved compensation structure relieves managers from short-term concerns and incentivizes them to disclose more firm-specific information. Our findings provide new insights on the bright side of labor protection and shed light on how stringent laws can shape the information environment in emerging markets.

Exploiting the staggered adoption of universal demand (UD) laws as exogenous shocks to filing derivative lawsuits, we find that weakened shareholder litigation rights cause a significant increase in the cost of debt. Deteriorated corporate governance, increased information asymmetry, and heightened managerial risk-taking are the underlying channels. Shareholders respond to weakened litigation rights by providing managers with less risk-taking incentives. Overall, our findings suggest that the shareholder litigation rights are important to debtholders.

Exploiting the staggered implementation of the EDGAR system from 1993 to 1996 as exogenous shocks to information dissemination technologies, we document that faster dissemination of corporate disclosures through the internet increases firms' future stock price crash risk. These results are robust to alternative sample constructions, measures of crash risk, and fixed effects. Supplemental evidence suggests two channels: an increase in stock liquidity and an increase in investors' reliance on public disclosure, both of which exacerbate managers' incentives to withhold bad news. Overall, our findings suggest that modern information technology may have an unintended effect on managers' bad news hoarding behavior.

We examine whether labor market frictions affect firms’ tax aggressiveness. Exploiting the adoption of U.S. state-level Wrongful Discharge Laws as a quasi-exogenous shock to a firm’s firing costs, we document a decline in tax aggressiveness for firms located in states that increase employment protection. We further show that greater employment protection increases distress risk. The decline in tax aggressiveness is more pronounced for firms that are more vulnerable to financial distress and constrained from external financial markets. Our results imply that firms avoid risky tax positions in order to mitigate increased distress risk due to more rigid labor costs.

This study examines the effect of institutional common ownership on a firm’s cost of equity capital. Recent empirical findings on common ownership yield opposing predictions: increased strategic alliance in the product market could increase the covariance of a firm’s cash flows with the other firms, leading to a higher cost of equity capital. Reduced product market risk that is in part non-diversifiable could lead to a lower cost of equity capital. In both OLS and difference-in-differences settings, we document a negative and significant relation between common ownership and the cost of equity capital. We also provide direct evidence on common ownership reduces product market predation risk, distress risk, and overall risk while increases stock liquidity. Overall, our findings indicate that common ownership offers benefits to individual firms by reducing the cost of equity financing.

Exploring staggered quasi-exogenous regulatory changes in China, we find that banking sector FDI significantly reduces the likelihood of stock price crashes of domestic listed firms. The effect is more pronounced among firms with ex-ante lower disclosure quality and worse performances, which indicates a monitoring spillover effect of foreign bank penetration on domestic firms. Moreover, we find evidence of reduced overall financing costs and extended loan maturity after foreign bank entry. Our findings highlight an unexplored role of the banking sector marketization in terms of curtailing stock price crash risks and improving the stability of stock markets.

We document that an increased likelihood of losing important stakeholders like key talents can lead to a higher stock price crash risk. Our test exploits U.S. state courts’ staggered rejections of the inevitable disclosure doctrine (IDD), which improves the ability of key talent to switch jobs. Relative to unaffected firms, we find that firms experience a significantly increased stock price crash risk after the states where they are headquartered reject the IDD. This effect is stronger for firms that face more industry competition and rely more heavily on key talents. Additional evidence shows that rejection of the IDD dampens firms’ competitive advantages to some extent. Overall, consistent with the view that a loss of key personnel can be an additional risk factor, our results suggest that an increased likelihood of key talent outflow can lead to bad news formation, which in turn results in stock price crashes.

Exploiting the staggered removal of short-sale bans in China, we document unintended real effects of allowing short selling in an emerging market featured by concentrated ownership and weak investor protection. Pilot firms have worse short-term and long-term market performances after the removal of short-sale bans. Additionally, pilot firms undertake less risk and have worse performance following the launch of the program. The effect is stronger when controlling shareholders' private benefit is large and when corporate governance is weak. Faced with increased short selling threats, pilot firms cut capital investments and R&D expenditures, reduce equity financing, and lower debt ratios. Contrary to prior studies showing that short selling encourages value-enhancing risky investments in developed markets, our findings suggest that in emerging markets such as China, short selling can result in value losses by inducing firms to forgo profitable risky projects.

We examine whether labor market frictions affect firms’ tax aggressiveness. Exploiting the adoption of U.S. state-level Wrongful Discharge Laws as a quasi-exogenous shock to a firm's firing costs, we document a decline in tax aggressiveness for firms located in states that increase employment protection. We further show that greater employment protection increases distress risk. The decline in tax aggressiveness is more pronounced for firms that are more vulnerable to financial distress and constrained from external financial markets. Our results imply that firms avoid risky tax positions in order to mitigate increased distress risk due to more rigid labor costs.

Using the extreme returns of firms in unrelated industries of institutional shareholders' portfolios as exogenous variations in institutional investor distraction (Kempf et al. 2017), we find a positive and significant relation between institutional shareholder distraction and stock price crash risk. The effect is associated with weakened monitoring, and it becomes stronger when alternative corporate governance is weaker and when managers' incentives to hoard bad information are stronger. Managers reduce firms' accounting conservatism when institutional investors become distracted, which is evidence of an increased motivation to hoard bad news. Overall, our findings shed additional light on the important monitoring role of institutional investors in corporate governance.

This study analyzes the impact of the entry of foreign banks on corporate innovation in China. Considering a group of A-share listed firms, we find that, compared to privately owned enterprises, the entry of foreign banks can significantly improve the level and quality of patent applications of state-owned enterprises. We further document that the entry of foreign banks can improve the information environment and curtail agency problems in such enterprises. Our evidence indicates that the entry of foreign banks can incentivize corporate innovation in an economy with strong government intervention and weak investor protection.

Using a difference-in-differences methodology, this paper finds that greater stakeholder orientation due to the adoption of non-shareholder constituency statutes, which allow directors to consider non-shareholder stakeholders' interests in decision making, significantly reduces discretionary accruals. The main effect is more pronounced for firms with greater tension between shareholders and stakeholders, and with higher information acquisition costs for the board. Further analysis shows that stakeholder orientation increases the value-relevance of earnings, and curtails real earnings management to some extent. Overall, my findings indicate that improved financial reporting quality can be a specific channel through which stakeholder orientation increases shareholder value.

This paper examines the relation between share pledging and corporate risk-taking in an environment featured by strong government intervention and high information opacity. We find that during the years 2005 through 2015, the level of share pledging is associated with less volatile earnings and tightened R&D expenditures for Chinese listed firms. We establish causality through a variety of econometric techniques, including a difference-in-differences approach based on a regulatory change that permits security companies to lend money to borrowers pledging their shares as collaterals. In addition, we find that share pledging is associated with enhanced innovation efficiency. Overall, our results highlight that share pledging constrains excessive risk-taking and improves the efficiency of risky investments through facilitating creditor monitoring.

This paper examines the effect of short selling on corporate tax avoidance. We propose a financial constraint view, that short selling triggers corporate insiders’ incentive to avoid taxes for funding investment opportunities in emerging markets. Employing staggered short-sale deregulation on the Chinese stock market as quasi-exogenous shocks, we find that the deregulation of short-sales reduces firms’ cash effective tax rates and effective tax rates by 11.8% and 21.1%, respectively. This effect is especially prominent for financially constrained firms and non-state-owned firms. We further show that short-sale deregulation indeed increases the cost of equity capital of Chinese listed firms. These results suggest that tax avoidance helps to generate additional funds and mitigates financial constraints under downward price pressure in emerging markets that have strong government intervention and lax law enforcement.