Examining the Impact of Political Stability on Stock Price Crash Risk: Evidence from China

Abstract

Political uncertainty has become an essential factor affecting the development of the substantial economy in recent years. It has also become a focal issue debated in the macroeconomic and microfinance circles. Apparently, in China, which is currently coexisting with transitioning and emerging markets, on the one hand, regular replacement of local government officials, the current administrative system coexists with an irregular replacement for various reasons. This paper empirically tests the influence of political uncertainty on the risk of stock price crashes based on the annual sample of 9,091 Chinese listed companies from 2007 to 2020. The empirical results suggest that corporate share price crash risk is lower when faced with political uncertainty. We further find that the inhibitory effect of political uncertainty on the risk of a stock price crash does not take effect until a new official takes office about a year or so. Moreover, officials who took office from a different place, especially new officials transferred by provincial departments, significantly reduce the risk of stock price crashes within their jurisdiction. Meanwhile, the abnormal departure of outgoing officials increases the risk of the stock prices crash of enterprises in their jurisdiction.