Do Credit Ratings Matter for Stock Price Crash Risk? New Evidence From China

ABSTRACT Through a large sample of China's firms, this research assesses whether and how firms' credit ratings affect future stock price crash risk (SPCR). Evidence reveals that credit ratings can negatively affect SPCR. The negative effect is consistently more pronounced when stock price synchronisation is higher and is stronger in firms with low institutional investor shareholding, suggesting that domestic credit rating agencies have the potential to enhance the information environment while simultaneously reducing regulatory costs. Moreover, the impact is more pronounced for firms with low media coverage, firms with low audit quality, and in state‐controlled firms. Through our research, policymakers and investors should pay more attention to credit ratings that help play the information intermediary role of credit rating agencies.