Derivative Complexity and the Stock Price Crash Risk: Evidence from China

Willa Li, Yuki Gong (), Yuge Zhang and Frank Li ()
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Willa Li: College of Computing, Georgia Institute of Technology, Atlanta, GA 30332, USA 2 Business School, University of Auckland, Auckland 1010, New Zealand 3 College of Economics, Ocean University of China, Qingdao 266100, China
Yuki Gong: College of Computing, Georgia Institute of Technology, Atlanta, GA 30332, USA 2 Business School, University of Auckland, Auckland 1010, New Zealand 3 College of Economics, Ocean University of China, Qingdao 266100, China
Yuge Zhang: College of Economics, Ocean University of China, Qingdao 266100, China
Frank Li: College of Computing, Georgia Institute of Technology, Atlanta, GA 30332, USA 2 Business School, University of Auckland, Auckland 1010, New Zealand 3 College of Economics, Ocean University of China, Qingdao 266100, China

IJFS, 2025, vol. 13, issue 2, 1-29

Abstract: This study investigates whether and how the complexity of derivative use influences the stock price crash risk in China’s capital market, a critical question given the growing use of derivatives in emerging economies where governance structures and disclosure standards vary widely. While prior research has examined the binary effects of derivative usage, limited attention has been paid to the multidimensional complexity of such instruments and its informational consequences. Using a novel hand-collected dataset of annual reports from Chinese A-share-listed firms between 2010 and 2023, we develop and implement new indicators that capture both the economic complexity (diversity and scale) and accounting complexity (reporting dispersion and fair-value hierarchy) of derivative use. Our analysis shows that higher complexity is associated with a significantly lower likelihood of stock price crashes. This effect is especially pronounced in non-state-owned firms and those with weaker internal-control systems, suggesting that derivative complexity can enhance information transparency and serve as a substitute for other governance mechanisms. These findings challenge the conventional view that complexity necessarily increases opacity and highlight the importance of disclosure quality and institutional context in shaping the market consequences of financial innovation.

Keywords: derivatives; economic complexity; accounting complexity; crash risk of stock price; emerging markets (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2025
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