An Analysis of the Dual Principal-Agent Problem on Stock Price Crash Risk : Evidence from China

This study investigates how the dual principal-agent problem is associated with stock price crash risk in China. Employing one of the largest datasets to-date of Chinese listed firms over the 2010–2019 period, we examine the effects of management shareholding ratio and equity restriction ratio on stock price crash risk based on theories including "bad news hiding", “convergence of interests” and “management defense” assumptions. The results shed light on that higher management shareholding ratio and equity restriction ratio lead to higher stock price crash risk for the firm, providing prediction power for future stock price crash for investors. Our findings are shown to be consistent and stable to various tests intended to solve potential endogeneity problems, including adding more control variables, extending predicational run window and employing the IV-2SLS approach. Besides, after a series of robustness tests such as median regression and two-dimensional clustering adjustment, the conclusions are still valid