The Unintended Effect of the Accountability System of State‐Owned Enterprises: Evidence From Crash Risk

ABSTRACT Manuscript Type Empirical. Research Question/Issue This study investigates the unintended effect of the accountability system for the illegal operation or investment of Chinese state‐owned enterprises (SOEs) (the accountability system) on stock price crash risk. Research Findings/Insights Employing the staggered difference‐in‐differences method, we find that the accountability system plays an unintended regulatory and deterrent role, leading to an increase in stock price crash risk. This effect is particularly pronounced for SOEs that have more powerful CEOs, operate in a weaker information environment, and receive less prepolicy attention from local governments. Our mechanism analysis suggests that the accountability system affects crash risk through the information environment. Further analyses indicate that the accountability system may increase stock price synchronicity. Our findings remain consistent across tests utilizing different specifications and alternative measures. Theoretical/Academic Implications This is one of the few studies to investigate the deterrent effects of the accountability system on managerial past misconduct in an emerging market, offering a more comprehensive understanding and evaluation of the net effects of this SOE reform. While the literature primarily examines the reform's governance effects on firms, our study focuses on its net effects as captured by SOE‐related crash risk, which has garnered significant attention from securities regulators and investors as the third moment of stock returns. Our study thus addresses an underexplored aspect of SOE reform. Practitioner/Policy Implications This research provides a new perspective on the economic consequences of a novel SOE regulatory reform in a typical emerging market. It contributes to SOE governance and policy formulation, offering valuable insights into SOE regulation and the protection of state‐owned assets in other emerging economies.