Journal of Applied Finance & Banking

Bank monitoring and stock price crash risk: Evidence from China

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  • Abstract

     

    This paper documents the negative relation between credit line and stock price crash risk in a weak-efficiency and bank dominated environment like China. Using data from china’s A-share listed firms, we find a significant negative relationship exists between credit line and stock price crash risk. The underlying mechanism analysis demonstrates that the bank monitoring of management, major shareholder’s tunneling activities, and financial constraints are the underlying mechanism. In heterogeneous tests, we find vicious competition among banks and preference for SOEs will weaken the monitoring effect of credit line. Finally, we use the first time credit line issuance as an exogenous shock, the PSM-DID test exhibits the same results.

     

    JEL classification numbers: G21, G31, G32

    Keywords: Credit line, Stock price crash risk, Principle agent problem

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