Lawsuits,Political Connections And Stock Price Crash Risk

In recent years,with the financial crisis and scandals of Enron,World Com and Fannie Mae,more and more scholars begin to pay attention to the risk of stock price crash.Compared with the western capital market,China’s stock market is more unstable and prone to sudden rise and fall.The crash of stock prices will not only reduce the confidence of external information users in the company,but also disturb the order of the capital market,leading to the weakening of market resource allocation functions.Therefore,how to deal with the risk of stock price crash has become one of the hot issues.At present,most of the researches on the external influencing factors of stock price crash risk are from the aspects of securities analysts,auditors or institutional investors,and there is little literature on the impact of lawsuits on the risk of stock price crash.Taking this as a starting point,this paper divides the lawsuits into the number of lawsuits and the amount of lawsuits to study how they affect the risk of stock price crash.Moreover,this paper also refers to and summarizes the existing domestic and foreign literature,puts the political connection and legal lawsuits and stock price crash risk into a unified framework,and studies the impact of political connection on the relationship between lawsuits and stock price crash risk.Since state-owned enterprises have natural political connections,which are not comparable,and private enterprises are non-public enterprises,under the current system background in China,they are often discriminated against and have stronger motivation to establish political ties.Therefore,this paper selects A-share private listed companies from 2010 to 2017 as the sample,and obtains 4949 observation values of 1228 companies,it was found that:(1)Lawsuits can reduce the risk of stock price crash,and this positive impact increases with the number and amount of lawsuits.The existing literature research found that lawsuits will bring adverse effects on enterprises,but this paper found that lawsuit is not only a formal mechanism,but also an external governance mechanism.It can improve the management’s disclosure and prompt the management to disclose the negative news in time,so that the internal and external information of the company can gradually reach an agreement,and the external information users can adjust their expectations of the company’s stock price,so as to reduce the risk of stock price crash.(2)Political connection will increase the risk of stock price crash,and this negative effect will increase with the increase of political connection strength.It has been found that political connection is a "double-edged sword",which will bring benefits and adverse effects to enterprises.The findings of this paper are as follows,companies with political connections can obtain precious opportunities and exclusive scarce resources.Therefore,in order to stabilize the political connection between the company and the government,and maintain the political status and political image of the company,once the bad news appears,the company will tend to conceal it.However,the bad news can not be concealed indefinitely.At a certain threshold,the bad news will blow out,causing the stock price crash risk.(3)Compared with companies without political connections,companies with political connections weaken the positive impact of legal proceedings on the risk of stock price crash.Due to China’s historical tradition and national conditions,most of people’s social and economic life are constrained by informal institutions.As an informal system,political connections play a more significant role than formal institutions,so they have a more serious impact on the risk of stock price crash.The influence mechanism is: If the company has political connection,it will tend to hide negative news to maintain the political connection and image of the company,which will lead to poor quality of information disclosure and increase the risk of stock price crash.