Decentralising for local information? Evidence from state-owned listed firms in China

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Author(s)

Detail(s)

Original languageEnglish
Journal / PublicationAccounting and Finance
Online published11 Jun 2023
Publication statusOnline published - 11 Jun 2023
Externally publishedYes

Abstract

This study investigates the effect of decentralisation of SOEs on stock price crash risk. In so doing, we test two competing hypotheses. Under the Political Influence Hypothesis, decentralisation aggravates local government's expropriation of minority shareholders (type II agency conflict), and thus increases crash risk. Under the Local Information Hypothesis, decentralisation decreases monitoring distance (type I agency conflict), strengthens external monitoring and thus decreases crash risk. We find robust evidence supporting the Political Influence Hypothesis. Cross-sectional analyses show that our baseline results are more pronounced when firms are decentralised to the provincial level and politicians have greater incentives to pursue their political objectives. We further show that bad news hoarding and risk-taking are two potential channels through which SOE decentralisation increases crash risk. Taken together, our results imply that the decentralisation exacerbates the type II agency conflict rather than ameliorates the type I agency conflict in SOEs. © 2023 Accounting and Finance Association of Australia and New Zealand.

Research Area(s)

  • agency conflict, crash risk, decentralisation, SOEs