Internal Control Weaknesses,Institutional Investor Heterogeneity,and Stock Price Crash Risk

Stock price crash risk often occur in the market,causing irreparable losses to companies and investors and affecting the healthy development of the stock market.Academia believes that the risk of stock price crash comes from "Bad news hoarding"in the company,which is related to the self-interested behavior of the management.Based on the data from Chinese listed companies from 2012 to 2018,this paper empirically tests the impact of internal control weaknesses(ICW)and their remediation on the stock price crash risk,and the governance effects of institutional investors.The results show that the stock price crash risk is higher in ICW firms than non-ICW firms.This relationship is different in different types of internal control weaknesses.and the effect of company-level ICW is greater than that of business-level ICW,the impact of serious internal control weaknesses is greater than the impact of general internal control weaknesses,Companies' stock price crash risk is lower when they remediate ICW.Revising ICW is conducive to strengthening the quality of internal control and constraining management.After further examining the heterogeneity of institutional investors,we find that the positive association between ICW and stock price crash risk is less pronounced in firms with stable institutional investors.Our study contributes to literature as follows.First,we expands the relevant research on the factors that influence the stock price crash risk.Based on the perspective of internal control;we starts with the negative indicator of internal control,focusing on impact of its specific content and dynamic changes on the risk of stock price crash.Second,the previous literature is controversial about the institutional investors' influence on corporate governance and the asset market.This article classify institutional investors and explore the impact of investors' heterogeneity on the relationship between ICW and crash risk.This article provide empirical evidence for a positive relationship between ICW and crash risk,and also affirms the regulatory role of stable institutional investors.New evidence for strengthening internal control and remediation of ICW is also provided,companies should treat ICW differently according to content and degree,and revise ICW in time to reduce agency problems.We provide suggestions for the company to strengthen internal governance and prevent the stock price crash risk.