Government ownership and stock price crash risk in banks: International evidence

We investigate how government ownership affects stock price crash risk in banks using an international sample of developed and emerging economies from 2002 to 2023. While state ownership that embodies soft budget constraints may reduce crash risk, it could also increase this risk due to the extreme agency problems and political interference. Using a sample of 529 banks from 38 countries, we find that government ownership significantly lowers banks’ crash risk, primarily through enhanced perceptions of sovereign support. This effect appears to be more pronounced during the global financial crisis and in countries with higher government subsidies, which provides support to the soft budget constraint channel. However, the effect diminishes in countries with left-leaning governments, where political interference undermines the stabilizing benefits of state ownership. We further show that the stabilizing effect of government ownership is concentrated in countries with stronger governance institutions. Our results remain robust after addressing potential endogeneity through instrumental variables and propensity score matching. • How government ownership affects stock price crash risk in banks. • Government ownership significantly lowers banks’ crash risk through enhanced perceptions of sovereign support. • This effect appears to be more pronounced during the global financial crisis and in countries with higher government subsidies. • The effect diminishes in countries with left-leaning governments, where political interference undermines the stabilizing benefits of state ownership.