State ownership, implicit government guarantees, and crash risk: Evidence from China

Abstract Using a large sample of Chinese listed firms, we examine the link between state ownership and firms' stock price crash risk. We find that state ownership is significantly associated with lower crash risk. Channels to explain the association are investigated. We do not find an increase in information diffusion in firms with higher state ownership. However, we find that an implicit government guarantee through state ownership plays a vital role in reducing firms' crash risk. State-owned firms with higher bailout guarantees are found to have lower crash risk. The embedded implicit government guarantee changes investors' perception, and crowds out short sellers and informed traders from the market. Difference-in-differences tests and tests based on instrumental variables provide confirming evidence of a causal link. Overall, our findings suggest that the presence of state ownership can reduce crash risk through implicit government guarantees, however, at the cost of lower market efficiency.