The Impact of Stock Price Crash Risk on the Cost of Capital: Empirical Study from China

Authors

  • Muhammad Hamza Khan Comsats University Islamabad, Lahore Campus, Lahore, Pakistan
  • Muhammad Rizwan Comsats University Islamabad, Lahore Campus, Lahore, Pakistan

Keywords:

Stock price crash risk, cost of capital, cost of debt, State-owned enterprise, China

Abstract

This study analyses the effect of Sock Price Crash Risk (SPCR) on the cost of capital in Chinese listed firms in the Shenzhen stock exchange and the shanghai Stock Exchange. We take a sample of 290 firms based on the highest value of assets of each firm. The cost of capital consists of two factors; the cost of equity (COE) and the cost of debt (COD). The SPCR is measured by using two statistics, one is NCSKEW means the negative coefficient of skewness of the firm-specific weekly returns and the second is DUVOL that means Down to-Up Volatility used to measure the crash likelihood weekly return of firm-specific and use the Modified PEG ratio model of Eston approach to measuring the cost of equity. We use panel data to run the regression model analyses. We find SPCR is a significantly positive relationship with the cost of equity and cost of debt. Also, the sample was divided into the State-Owned enterprise (SOEs) and Non-State-Owned enterprise (NSOEs) for comparison. The results show that impact of SPCR on the COE and COD stronger in SOEs than NSOEs. The regulators need to improve and strengthen the development of laws and regulations related to company information disclosure, to reduce the cost of capital of listed companies and improve the efficiency of financing the Chinese capital market. Companies need to work together to strengthen internal controls, create a good disclosure environment, and prevent the SPCR.

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Published

2021-06-23

How to Cite

Khan, M. H. and Rizwan, M. (2021) “The Impact of Stock Price Crash Risk on the Cost of Capital: Empirical Study from China”, Journal of Economic Impact, 3(2). Available at: http://www.scienceimpactpub.com/journals/index.php/jei/article/view/76 (Accessed: 26July2021).
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