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Business & Economics

THE IMPACT OF BANK COMPETITION ON STOCK PRICE CRASH RISK: EVIDENCE FROM THE CHINESE MARKET
Xueren Zhang, Yuliang Zhao, Rangkun Qi, Muhammad Usman

ABSTRACT. Credit financing of listed companies has been continuously elevated under the background of aggravated bank competition. Excessive credit supply provides capital support for over-investment; however, over-investment aggravates stock price crash risk. To explore the impact of bank competition on capital market from the angle of crash risk, the influence mechanism of bank competition on stock price crash, and the mediating effect of debt financing in the above influence relation were analysed by using micro-data of Chinese-listed companies and competition within the banking industry during 2006-2016.
Results show that under the aggravated bank competition, enterprise debt financing is elevated and thus increases the probability of stock price crash risk. For enterprises with weak external supervision and major internal control problem, bank competition significantly aggravates the stock price crash risk owing to information asymmetry. For enterprises under light financing constraints, sufficient cash flow brought by bank competition stimulates over-investment and increases the crash risk of their stock prices. The conclusions can serve as a supplement for investigating external factors which influence crash of stock prices of listed companies, and provide new evidentiary support for economic consequences of fierce competition in the banking industry.

KEYWORDS:  bank competition, stock price crash risk, inefficient investment, cash flow.

JEL classification:  D21, G34, G38.