Examining the Governance Effect of Institutional Investors on Stock Price Crash Risk

• Published in: Journal of the knowledge economy 2024-06, Vol.15 (2), p.9053-9081
• Main Authors: Lu, Jing, Cao, Guohua, Lin, Chuan, Sindakis, Stavros, Showkat, Saloome
• Format: Article
• Language: English
• Subjects: Disclosure; Economic Policy; Economics; Economics and Finance; Entrepreneurship; Equity; Institutional investments; Investors; R & D/Technology Policy; Risk; Securities markets; Stock prices
• ISSN: 1868-7873; 1868-7865; 1868-7873
• DOI: 10.1007/s13132-023-01439-x

This study examines the impact of Independent Institutional Investors’ (IIs) Equity Trading (IIET) on crash risk from the perspective of IIET governance. Using a sample of Chinese-listed firms from 2008 to 2021, we investigate the role of IIET in inhibiting stock price crash risk and its underlying mechanisms. Our findings demonstrate that IIET can effectively reduce crash risk even after accounting for endogeneity and robustness factors. We identify the improving effect of IIET on information disclosure as a key driver, which mitigates information concealing by managers and contributes to lower crash risk. The research objectives are twofold: first, to explore the influence of IIs’ Exit Threat (E.T.) implemented through IIET on stock price crash risk, and second, to examine the economic consequences and governance effect of IIET. Our study makes several contributions by analyzing data from Chinese-listed A-share firms over a 14-year period. Firstly, we extend the literature by providing empirical evidence on the impact of IIET on crash risk, offering novel insights into the relationship between IIET and stock market stability. Secondly, our research highlights the significance of IIET in the governance of listed firms, contributing to the understanding of the economic consequences of IIs’ E.T. governance behavior. The findings emphasize the importance of fostering a conducive environment for IIET, establishing effective mechanisms for IIs to voice their concerns and promoting transparent information disclosure. Ultimately, our research contributes to theory development and has practical implications for enhancing the governance of IIET and ensuring the stability and efficiency of the stock market.