Principal–principal agency problems and stock price crash risk: Evidence from the split‐share structure reform in China

• Published date: 01 May 2017
• Author: Jian Sun,Feng Cao,Rongli Yuan,Baiqiang Wang
• Date: 01 May 2017
• DOI: http://doi.org/10.1111/corg.12202

SPECIAL ISSUE ARTICLE

Principal–principal agency problems and stock price crash risk:

Evidence from the split‐share structure reform in China

Jian Sun

1

|Rongli Yuan

2

|Feng Cao

3

|Baiqiang Wang

4

1

School of Accountancy, Central University of

Finance and Economics, Beijing, China

2

School of Business, Renmin University of

China, Beijing, China

3

Business School, Hunan University,

Changsha, Hunan, China

4

Guanghua School of Management, Peking

University, Beijing, China

Correspondence

Feng Cao, Business School, Hunan University,

No. 109 Shijiachong Road, Changsha, Hunan

410006, China. Phone: +86‐0731‐88822899

Fax: +86‐0731‐88823670

Email: caofeng@hnu.edu.cn

Funding information

National Natural Science Foundation of China,

Grant/Award Number: 71672208, 71602053.

China Postdoctoral Science Foundation,

Grant/Award Number: 2016 M602413.

Fundamental Research Funds for the Central

Universities, Grant/Award Number:

531107050817

Abstract

Manuscript Type: Empirical

Research Question/Issue: On April 2005, the China Securities Regulatory Commission

(CSRC) launched the split‐share structure reform to mitigate principal–principal agency problems.

Using the reform as an exogenous shock, we examine the impact of principal–principal agency

problems on stock price crash risk. Specifically, this study attempts to answer two questions:

(1) Does the split‐share structure reform in China decrease stock price crash risk? (2) Is the above

effect induced by the mitigation of principal–principal agency problems?

Research Findings/Insights: We find that the reform induces a significant decrease in crash

risk after controlling for other predictors of crash risk, and this effect is more pronounced in firms

with a higher proportion of shares held by controlling shareholders. Moreover, we find that the

negative impact of the reform on stock price crash risk is more pronounced in firms with a high

level of tunneling prior to the reform, which indicates that reform induces less tunneling, and

adversely affects crash risk.

Theoretical/Academic Implications: This study contributes to the literature in two ways.

First, this study constitutes the first effort to explore the determinants of stock price crash risk

from the perspective of principal–principal agency problems. Second, this study enriches the

growing literature on the economic consequences of the split‐share structure reform in China.

Practitioner/Policy Implications: We draw two important implications from our results.

First, our findings highlight that regulatory intervention is an important way to enhance corporate

governance. This is particularly beneficial in China, a transitional economy which may lag in terms

of general protection of investors and information disclosure. Second, this study also confirms

that minority shareholders and listed firms benefit from the reform. Both are crucial to the

healthy development of the capital market in China.

KEYWORDS

corporate governance, non‐tradableshares, principal–principal agency problems, split‐share

structure, stockprice crash risk

1|INTRODUCTION

Stock price crash risk has attracted increasing attention in recent years.

A series of studies show that the accumulation of bad news (“bad news

hoarding”) by corporate managers due to managerial incentives is the

key factor in the formation of stock price crash risk (e.g., An & Zhang,

2013; Callen & Fang, 2013, 2015; Kim, Li, & Zhang, 2011a, 2011b; Kim

& Zhang, 2016; Yuan, Sun, & Cao, 2016). Specifically, corporate man-

agers tend to withhold bad news due to managerial incentives (Kothari,

Shu, & Wysocki, 2009; LaFond & Watts, 2008). If the bad news is with-

held and accumulated for an extended period, negative information is

likely to be stockpiled within a firm. However, there is a certain point

at which it becomes too costly or impossible to withhold the bad news

(Kothari et al., 2009). When such a tipping point arrives, all the hitherto

hidden bad news will come out at once, resulting in a large negative

price adjustment, that is, a crash (Hutton, Marcus, & Tehranian, 2009;

Jin & Myers, 2006). Thus, prior studies mainly focus on principal–

agency problems (i.e., the conflicts of interest between shareholders

Received: 15 September 2015 Revised: 24 January 2017 Accepted: 24 January 2017

DOI: 10.1111/corg.12202

186 © 2017 John Wiley & Sons Ltd Corp Govern Int Rev. 2017;25:186–199.wileyonlinelibrary.com/journal/corg