Local Economic Performance, Political Promotion, and Stock Price Crash Risk: Evidence from China

Abstract

This paper explores the association between promotion pressure on local officials and the risk of stock price crashes in China. Using local economic development data, we construct an index of performance pressure on local officials. Using data from 195 Chinese cities and 1,101 listed firms in those cities during 2006–2018, we find that performance pressure is negatively associated with the stock price crash risk. However, the negative association only exists for state-owned firms and is stronger for local officials with higher ex-ante promotion probability and those promoted after their current tenures. We also find that earnings management and over-investment are the underlying channels through which performance pressure affects crash risk. Our findings imply that the top-down assessment system for local officials in China has economic consequences for local firms.

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