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

Babatounde Ifred Paterne Zonon (), Xianzhi Wang, Chuang Chen and Mouhamed Bayane Bouraima
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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

Economies, 2025, vol. 13, issue 6, 1-24

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.

Keywords: cost of equity; stock price crash risk; causality; bull market; bear market; G10; G15; G32 (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2025
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