When bad news is good news: implicit government guarantees and stock price crash risk

We study how weakening implicit government guarantee expectations in China’s public credit market affects stock price crash risk. We exploit the March 2014 Chaori default as a shock to rigid-repayment expectations and use a difference-in-differences design. Crash risk falls significantly among firms with public credit-market exposure before the shock, and the result remains after accounting for issuer-level default risk. Adverse earnings news enters stock prices earlier, bond spreads become more informative about subsequent stock returns, and firms with greater pre-shock bond-market exposure experience larger declines in crash risk. Analysts, the media, and online investors provide more downside information. Firms also disclose more bad news, recognize losses sooner, report more promptly, and improve internal-control quality. The decline in crash risk is significantly larger among state-owned enterprises, where expectations of government support were stronger before the shock. The findings identify the credibility of government support as an institutional determinant of cross-market information efficiency and show how market-based credit-risk pricing can strengthen equity-market resilience.