Political Incentives to Suppress Negative Information: Evidence from Chinese
Listed Firms
#MMPMIDC7166360
PIOTROSKI JD
; WONG TJ
; ZHANG T
?-/-? 2015[May]; 53
(2
): 405-59
PMIDC7166360
show ga
This paper tests the proposition that politicians and their affiliated firms
(i.e., firms operating in their province) temporarily suppress negative
information in response to political incentives. We examine the stock price
behavior of Chinese listed firms around two visible political events?meetings of
the National Congress of the Chinese Communist Party and promotions of high?level
provincial politicians?that are expected to asymmetrically increase the costs of
releasing bad news. The costs create an incentive for local politicians and their
affiliated firms to temporarily restrict the flow of negative information about
the companies. The result will be fewer stock price crashes for the affiliated
firms during these event windows, followed by an increase in crashes after the
event. Consistent with these predictions, we find that the affiliated firms
experience a reduction (an increase) in negative stock return skewness before
(after) the event. These effects are strongest in the three?month period directly
preceding the event, among firms that are more politically connected, and when
the province is dominated by faction politics and cronyism. Additional tests
document a significant reduction in published newspaper articles about affected
firms in advance of these political events, suggestive of a link between our
observed stock price behavior and temporary shifts in the listed firms?
information environment.
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