Do Passive Institutional Investors Increase The Risk Of Stock Price Crashes?

In recent years,passive investment methods represented by index investment have developed rapidly at home and abroad.The global ETF scale has grown from about US$80 billion in 2000 to nearly US$5.6 trillion by the end of 2020,with a compound annual growth rate of about 24%.Domestically,the market size of passive securities investment funds has grown to nearly 1.5 trillion yuan by the end of 2020.The rapid development is the trend of the asset management industry conforming to the standardization,but behind the rapid development there are potential financial risks,such as increased market volatility and frequent occurrence of extreme events.Therefore,identifying the connection and influence mechanism between the two is of great significance for promoting market stability and improving pricing efficiency.Through theoretical analysis,we believe that passive institutional investors may influence the stock crash risk through both internal and external channels.The first is through internal channels that promote management’s opportunistic behavior.Passive investment has free-rider behavior in supervision.The lack of supervision may lead to management’s tendency to opportunistic behavior,which increases the hiding and accumulation of unfavorable information and makes the degree of information asymmetry increases.The second is through the external channel that distort the external information environment.Passive institutional investors,on the one hand,improve the synchronization of stock prices,making stock price information less efficient,and on the other hand,increase analyst optimism bias and distort the external information environment,all of which significantly increase the crash risk.This article uses A-share listed companies from 2007 to 2020 as a sample to study whether passive institutional investors will have an impact on the risk of stock price collapse from the micro level of the company,and examine the specific mechanism of this impact.We use index funds to represent passive institutional investors.In the multiple regression part,holdings of passive institutional investors are used to regress the crash risk of listed companies’ future stock prices,and the instrumental variable method is used to alleviate potential endogeneity problems.After finding that passive institutional holdings have a significant positive impact on the risk of stock price crash,this article uses the method of intermediary variable testing to explore the possible impact mechanism.The analysis of the first channel,aggravating the opportunistic behavior of management,selects earnings management indicators,and the analysis of the second channel,distorting the external information environment selects stock price synchronization and analyst optimism bias indicators.We find both channels work.In the robustness part,this paper makes appropriate adjustments to the dependent variable,the independent variable,the sample selection space,and the regression model,and uses group regression to verify the impact mechanism.We find that the conclusion of this paper is still steady.Finally,we find:(1)Passive institutional investors will increase the risk of future stock price crash,which is still true after controlling the endogenity.(2)There are two main channels for passive institutional investors to increase the risk of crash:one is to promote opportunistic behavior of managers,and the other is to distort the external information environment.The contribution of this article is to identify the financial risks brought by passive institutional investors,and to discover the related influence mechanism,which facilitate the formulation of effective policy recommendations.First,we recommend that regulatory authorities could urge passive institutional investors to actively participate in corporate governance.Second,regulatory authorities should guide passive investment funds to develop in an orderly and healthy manner,and prevent systemic risks.Third,regulatory authorities should further incentivize analysts to play an information discovery role,and at the same time improve the short-selling mechanism to alleviate the crash risk.Through active policy guidance,regulators can effectively alleviate the transmission effect of internal and external channels,which can significantly reduce the stock price crash risks and keep stable stock market.