Product market competition, corporate governance and stock price crash risk: Evidence from China

We investigate the relationship between product market competition and internal corporate governance from the perspective of stock price crash risk using a sample of Chinese A-share listed firms from 2003 to 2014. We find that product market competition significantly decreases stock price crash risk and this effect is more pronounced for firms with poor corporate governance (i.e. state-owned enterprises (SOEs), firms with remote independent directors, and firms with lower managerial ownership). This pattern of evidence suggests that product market competition, as an external governance mechanism can substitute poor internal corporate governance by disciplining insiders' information hoarding and thus lead to lower stock price crash risk. The further finding that market competition improves information quality supports the information hoarding channel. Our findings hold up to a battery of robustness checks and endogeneity tests.