Vertical interlock and stock price crash risk

This paper investigates the impact of vertical interlock on future stock price crash risk. Using a sample of 11,662 observations on Chinese listed firms affiliated business groups from the year 2007 to 2018, we find that affiliated listed firms with vertical interlock tend to have greater stock price crash risk, and the positive effects of vertical interlock are more pronounced when the interlocking positions have higher hierarchy in controlling business groups. Such results remain strong after controlling for other important factors and conducting several robustness checks. Overall, our findings suggest that vertical interlock tends to facilitate sheltering bad information by majority shareholders, implying intensified agency problems between majority shareholders and minority shareholders within business groups.