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