 Visible hands versus invisible hands: Default risk and stock price crashes in ChinaHuaigang Long, Cuixia Tao, Zhongwei Yao and Yanjian Zhu Pacific-Basin Finance Journal, 2025, vol. 91, issue C Abstract: This paper revisits the default-crash risk relation in the context of China. We find that firms with higher default risk have lower stock price crash risk at both monthly and yearly frequencies. To identify the causal effect, we use the first-ever default event in China’s onshore bond market in 2014 as an exogenous shock to the strength of implicit guarantees. The negative relation arises from the active involvement of the government before 2014 and creditors after 2014 in corporate governance. Consistent with the external scrutiny mechanism, the impact of default risk on stock price crashes is stronger in situations where creditors are more likely to engage in active monitoring (i.e., firms with higher liquidation costs, lower liquidation value, higher levels of information asymmetry, and non-state-owned firms), with these effects being primarily observed in the post-2014 period. Overall, our study highlights the role of the “invisible hand” in the absence of the “visible hand”. Keywords: Default risk; Stock price crash risk; Corporate governance; Implicit guarantee (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:91:y:2025:i:c:s0927538x25000526 DOI: 10.1016/j.pacfin.2025.102715 Access Statistics for this article Pacific-Basin Finance Journal is currently edited by K. Chan and S. Ghon Rhee More articles in Pacific-Basin Finance Journal from Elsevier |
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