Product Market Competition and Stock Price Crash Risk: Evidence from China

Yunbiao Ma (), Xiaotong Yang (), Yuan Zhang () and Bing Zhu
Additional contact information
Yunbiao Ma: School of Accountancy, Central University of Finance and Economics, Beijing, China
Xiaotong Yang: School of Accounting, Zhongnan University of Economics and Law, Wuhan, China
Yuan Zhang: School of Accounting, Guizhou University of Finance and Economics, Guiyang, China
Bing Zhu: School of Accountancy, Central University of Finance and Economics, Beijing, China

The International Journal of Accounting (TIJA), 2024, vol. 59, issue 03, 1-37

Abstract: SynopsisThe research problemThis study analyzes the relationship between product market competition (PMC) and stock price crash risk in China, especially for firms with weak corporate governance and a lower-quality information environment.MotivationEmerging capital markets like China have less-developed financial systems and institutions compared to developed capital markets like Europe and the United States, making them more susceptible to stock price crash risk. The impact of product market competition (PMC) on corporate decision-making has attracted considerable attention from scholars, especially given the increasingly intense and complex strategic competition in global markets and uncertainty in the world today. However, the effect of PMC on a firm’s stock price crash risk has not been thoroughly explored. Therefore, this study investigated how PMC affects managers’ tendency to hoard bad news and how this behavior contributes to the risk of stock price crashes.The test hypothesesWe tested two competing hypotheses: PMC is negatively correlated with crash risk, and PMC is positively correlated with crash risk.Target populationThis study should be of interest to stakeholders, including firm managers, practitioners, regulatory authorities, policymakers, and investors.Adopted methodologyThis study employed ordinary least squares (OLS), difference-in-differences analysis (DID), and path analysis.AnalysisUsing a sample of Chinese A-share listed manufacturing firms from 2000 to 2021, this study found that competitive pressure from the product market encouraged managers to hide bad news, thereby increasing future stock price crash risk. Moreover, we performed additional tests to examine how PMC affected stock price crash risk.FindingsWe found robust evidence that PMC significantly increases stock price crash risk. Further tests showed that the effect of PMC on crash risk is more pronounced for firms with weak corporate governance and a lower-quality information environment. We also provide evidence that firms in highly competitive industries tend to disclose fewer negative words in the management discussion and analysis section of the annual report and fewer risk factors in the internal control report. Moreover, we show that operational risk is the underlying driver through which PMC affects crash risk.

Keywords: Product market competition; stock price crash risk; agency conflict; operational risk (search for similar items in EconPapers)
JEL-codes: G34 L10 M41 (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S1094406024500112
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:tijaxx:v:59:y:2024:i:03:n:s1094406024500112

Ordering information: This journal article can be ordered from

DOI: 10.1142/S1094406024500112

Access Statistics for this article

The International Journal of Accounting (TIJA) is currently edited by A. Rashad Abdel-khalik

More articles in The International Journal of Accounting (TIJA) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().