Mechanisms Underlying Geopolitical Shocks and Stock Price Crash Risk: Evidence from China

Nana Xu, Zhifang He, Fangzhao Zhou, Wenjie Ding and Jiaqi Chen

Emerging Markets Finance and Trade, 2023, vol. 59, issue 15, 4194-4203

Abstract: Geopolitical uncertainty imposes a significant impact on stock prices in the stock market. We construct dynamic estimations of geopolitical risk exposure of individual stocks listed in China and examine the relationship between individual geopolitical risk and future stock price crash risk. Our results show that geopolitical risk is a more prominent macro factor than economic policy uncertainty measure that affects stock price crash risk. Investigating the underlying mechanism, we find that firms with highly synchronized stock prices, low analyst coverage ratio, low institutional holdings, and large investor heterogeneity tend to be affected more by geopolitical shocks, leading to future stock price crashes. This study shows the importance of promoting efficient information transmission system and improving corporate governance.

Date: 2023
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DOI: 10.1080/1540496X.2023.2195535

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