American Journal of Theoretical and Applied Business

| Peer-Reviewed |

Internal Control Effectiveness and Stock Price Crash Risk: Evidence from China

Received: 31 October 2020    Accepted: 11 November 2020    Published: 19 November 2020
Views:       Downloads:

Share This Article

Abstract

Stock price crash is the extreme negative values of price distribution which can make investors suffer from huge losses and harm the stability of security market. Because of the heavy consequences, how to avoid stock price crash is a topic of significant importance. According to the “bad news hoarding” theory, transparency is a key determinant to restrain stock price crash risk. This is because transparent firms can fairly and comprehensively transfer information to investors, thus reduce the information asymmetry between the two parties. Internal control is an intergraded institutional arrangement and aims at improving reporting quality. In theory, internal control plays a role in impacting transparency and further affects stock price crash risk. Selecting companies listed on China’s main board from 2008 to 2019 and conducting mediating effect tests, this paper explores the mechanism on how internal control effectiveness influences stock price crash risk. Findings show that: (1) internal control effectiveness is negatively correlated to stock price crash risk; (2) internal control effectiveness is positively correlated to transparency; (3) transparency is negatively related to stock price crash risk; and (4) internal control effectiveness has a partial mediating effect on the relationship between internal control effectiveness and stock price crash risk. The findings indicate that effective internal control can decrease stock price crash risk via enhancing transparency. This paper extends extant literature by investigating the mechanism on how internal control effectiveness affects stock price crash in the emerging market of China.

DOI 10.11648/j.ajtab.20200604.13
Published in American Journal of Theoretical and Applied Business (Volume 6, Issue 4, December 2020)
Page(s) 66-71
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Internal Control Effectiveness, Stock Price Crash Risk, Transparency

References
[1] Jin, L. and S. C. Myers (2006). R2 around the world: New theory and new tests. Journal of Financial Economics, 79 (2), 257-292.
[2] Doyle, J. T., W. Ge, and S. McVay (2007). Accruals quality and internal control over financial reporting. The Accounting Review, 82 (5), 1141-1170.
[3] Chan, K. C., B. Farrell, and P. Lee (2008). Earnings management of firms reporting material internal control weaknesses under Section 404 of the Sarbanes-Oxley Act. Auditing: A Journal of Practice & Theory, 27 (2), 161-179.
[4] Ashbaugh-Skaife, H., et al. (2008). The effect of SOX internal control deficiencies and their remediation on accrual quality. The Accounting Review. 83 (1), 217-250.
[5] Goh, B. W. and D. Li (2011). Internal controls and conditional conservatism. Accounting Review, 86 (3), 975-1005.
[6] Rice, S. C., D. P. Weber, and B. Wu (2015). Does SOX 404 have teeth? Consequences of the failure to report existing internal control weaknesses. Accounting Review, (3), 1169-1200.
[7] Feng, M., et al. (2015). Does ineffective internal control over financial reporting affect a firm's operations? Evidence from firms' inventory management. The Accounting Review, (2), 529-557.
[8] D’Mello, R., X. Gao, and Y. Jia (2017). Internal control and internal capital allocation: evidence from internal capital markets of multi-segment firms. Review of Accounting Studies, 22 (1), 251-287.
[9] Chen, C., J.-B. Kim, and L. Yao (2017). Earnings smoothing: Does it exacerbate or constrain stock price crash risk? Journal of Corporate Finance, 42, 36-54.
[10] Kubick, T. R. and G. B. Lockhart (2016). Proximity to the SEC and stock price crash risk. Financial Management, 45 (2), 115-127.
[11] Xu, N., et al. (2017). Analyst herding and stock price crash risk: Evidence from China. Journal of International Financial Management & Accounting, 28 (3), 308-348.
[12] Liang, Q., D. Li, and W. Gao (2020). Ultimate ownership, crash risk, and split share structure reform in China. Journal of Banking and Finance, 113, 105751.
[13] Hutton, A. P., A. J. Marcus, and H. Tehranian (2009). Opaque financial reports, R2, and crash risk. Journal of Financial Economics, 94 (1), 67-86.
[14] Kothari, S. P., S. Shu, and P. D. Wysocki (2009). Do managers withhold bad news? Journal of Accounting Research, 47 (1), 241-276.
[15] Piotroski, J. D., T. J. Wong, and T. Zhang (2015). Political incentives to suppress negative information: Evidence from Chinese listed firms. Journal of Accounting Research, 53 (2), 405-459.
[16] Baron, R. M. and D. A. Kenny (1986). The moderator-mediator variable distinction in social psychological research: conceptual, strategic, and statistical considerations. Journal of Personality and Social Psychology, 51 (6), 1173-1182.
[17] Kim, J.-B., Y. Li, and L. Zhang (2011). CFOs versus CEOs: Equity incentives and crashes. Journal of Financial Economics, 101 (3), 713-730.
[18] Chen, J., H. Hong, and J. C. Stein (2001). Forecasting crashes: trading volume, past returns, and conditional skewness in stock prices. Journal of Financial Economics, 61 (3), 345-381.
Author Information
  • School of Management, Harbin Institute of Technology, Harbin, China

  • School of Management, Harbin Institute of Technology, Harbin, China

Cite This Article
  • APA Style

    Fusheng Wang, Jieqiong Hu. (2020). Internal Control Effectiveness and Stock Price Crash Risk: Evidence from China. American Journal of Theoretical and Applied Business, 6(4), 66-71. https://doi.org/10.11648/j.ajtab.20200604.13

    Copy | Download

    ACS Style

    Fusheng Wang; Jieqiong Hu. Internal Control Effectiveness and Stock Price Crash Risk: Evidence from China. Am. J. Theor. Appl. Bus. 2020, 6(4), 66-71. doi: 10.11648/j.ajtab.20200604.13

    Copy | Download

    AMA Style

    Fusheng Wang, Jieqiong Hu. Internal Control Effectiveness and Stock Price Crash Risk: Evidence from China. Am J Theor Appl Bus. 2020;6(4):66-71. doi: 10.11648/j.ajtab.20200604.13

    Copy | Download

  • @article{10.11648/j.ajtab.20200604.13,
      author = {Fusheng Wang and Jieqiong Hu},
      title = {Internal Control Effectiveness and Stock Price Crash Risk: Evidence from China},
      journal = {American Journal of Theoretical and Applied Business},
      volume = {6},
      number = {4},
      pages = {66-71},
      doi = {10.11648/j.ajtab.20200604.13},
      url = {https://doi.org/10.11648/j.ajtab.20200604.13},
      eprint = {https://download.sciencepg.com/pdf/10.11648.j.ajtab.20200604.13},
      abstract = {Stock price crash is the extreme negative values of price distribution which can make investors suffer from huge losses and harm the stability of security market. Because of the heavy consequences, how to avoid stock price crash is a topic of significant importance. According to the “bad news hoarding” theory, transparency is a key determinant to restrain stock price crash risk. This is because transparent firms can fairly and comprehensively transfer information to investors, thus reduce the information asymmetry between the two parties. Internal control is an intergraded institutional arrangement and aims at improving reporting quality. In theory, internal control plays a role in impacting transparency and further affects stock price crash risk. Selecting companies listed on China’s main board from 2008 to 2019 and conducting mediating effect tests, this paper explores the mechanism on how internal control effectiveness influences stock price crash risk. Findings show that: (1) internal control effectiveness is negatively correlated to stock price crash risk; (2) internal control effectiveness is positively correlated to transparency; (3) transparency is negatively related to stock price crash risk; and (4) internal control effectiveness has a partial mediating effect on the relationship between internal control effectiveness and stock price crash risk. The findings indicate that effective internal control can decrease stock price crash risk via enhancing transparency. This paper extends extant literature by investigating the mechanism on how internal control effectiveness affects stock price crash in the emerging market of China.},
     year = {2020}
    }
    

    Copy | Download

  • TY  - JOUR
    T1  - Internal Control Effectiveness and Stock Price Crash Risk: Evidence from China
    AU  - Fusheng Wang
    AU  - Jieqiong Hu
    Y1  - 2020/11/19
    PY  - 2020
    N1  - https://doi.org/10.11648/j.ajtab.20200604.13
    DO  - 10.11648/j.ajtab.20200604.13
    T2  - American Journal of Theoretical and Applied Business
    JF  - American Journal of Theoretical and Applied Business
    JO  - American Journal of Theoretical and Applied Business
    SP  - 66
    EP  - 71
    PB  - Science Publishing Group
    SN  - 2469-7842
    UR  - https://doi.org/10.11648/j.ajtab.20200604.13
    AB  - Stock price crash is the extreme negative values of price distribution which can make investors suffer from huge losses and harm the stability of security market. Because of the heavy consequences, how to avoid stock price crash is a topic of significant importance. According to the “bad news hoarding” theory, transparency is a key determinant to restrain stock price crash risk. This is because transparent firms can fairly and comprehensively transfer information to investors, thus reduce the information asymmetry between the two parties. Internal control is an intergraded institutional arrangement and aims at improving reporting quality. In theory, internal control plays a role in impacting transparency and further affects stock price crash risk. Selecting companies listed on China’s main board from 2008 to 2019 and conducting mediating effect tests, this paper explores the mechanism on how internal control effectiveness influences stock price crash risk. Findings show that: (1) internal control effectiveness is negatively correlated to stock price crash risk; (2) internal control effectiveness is positively correlated to transparency; (3) transparency is negatively related to stock price crash risk; and (4) internal control effectiveness has a partial mediating effect on the relationship between internal control effectiveness and stock price crash risk. The findings indicate that effective internal control can decrease stock price crash risk via enhancing transparency. This paper extends extant literature by investigating the mechanism on how internal control effectiveness affects stock price crash in the emerging market of China.
    VL  - 6
    IS  - 4
    ER  - 

    Copy | Download

  • Sections