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Strengthened board monitoring from parent company and stock price crash risk of subsidiary firms

Guilong Cai, Yue Xu, Degan Yu, Junsheng Zhang and Guojiang Zheng

Pacific-Basin Finance Journal, 2019, vol. 56, issue C, 352-368

Abstract: This article examines whether and how stronger board monitoring in a parent company influences the stock price crash risk of affiliated subsidiary firms. Using a quasi-natural experiment in China, we empirically document that enhanced board monitoring at the parent company helps reduce crash risk in its subsidiary firms. Three channels of this impact are identified: (i) better corporate governance in the parent company can prevent it from tunneling wealth from the subsidiary firm, (ii) better corporate governance in the parent company helps it better monitor the subsidiary firm, and (iii) better corporate governance in the parent company can spill over to the subsidiary firm and thus constrain managers in the subsidiary firm from misconduct in dealing with negative information.

Keywords: Stock price crash risk; Board reform; Central state-owned enterprise (CSOE); Business group (search for similar items in EconPapers)
JEL-codes: G32 G30 G38 M41 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.pacfin.2019.06.009

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Pacific-Basin Finance Journal is currently edited by K. Chan and S. Ghon Rhee

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Handle: RePEc:eee:pacfin:v:56:y:2019:i:c:p:352-368