Foreign Investors, External Monitoring, and Stock Price Crash Risk

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

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Original languageEnglish
Pages (from-to)829-853
Journal / PublicationJournal of Accounting, Auditing and Finance
Issue number4
Online published22 Apr 2019
Publication statusPublished - 1 Oct 2020


We investigate whether foreign investors help to reduce local firms’ future stock price crash risk through their external monitoring. We find that the entrance of foreign investors is associated with a significant reduction in local firms’ future crash risk. Further investigation reveals that foreign investors help to improve local firms’ financial reporting quality from the perspectives of accrual quality, conservatism, and annual report tone management. The evidence is consistent with our conjecture that foreign investors play an important external monitoring role, which reduces managerial bad-news hoarding and thereby lowers local firms’ future crash risk. We also find that the crash risk–reducing role of foreign investors is more pronounced when foreign investors are more familiar with the institutional background of the host country, when they have stronger incentives to monitor local firms, and when local firms have higher governance efficacy. A variety of robustness checks reveals that our results are unlikely to be driven by potential endogeneity.

Research Area(s)

  • foreign investors, stock price crash risk, financial reporting quality, institutional distance

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