The Effect of Corporate Integrity on Stock Price Crash Risk

  • YIN, Hong (Department of Accounting, Business School, Suzhou Vocational University) ;
  • ZHANG, Ruonan (Department of International Trade, Business School, Suzhou Vocational University)
  • Received : 2019.09.14
  • Accepted : 2020.01.05
  • Published : 2020.01.30


Purpose: This research aims to investigate the impact of corporate integrity on stock price crash risk. Research design, data, and methodology: Taking 1419 firms listed in Shenzhen Stock Exchange in China as a sample, this paper empirically analyzed the relationship between corporate integrity and stock price crash risk. The main integrity data was hand-collected from Shenzhen Stock Exchange Website. Other financial data was collected from CSMAR Database. Results: Findings show that corporate integrity can significantly decrease stock price crash risk. After changing the selection of samples, model estimation methods and the proxy variable of stock price crash risk, the conclusion is still valid. Further research shows that the relationship between corporate integrity and stock price crash risk is only found in firms with weak internal control and firms in poor legal system areas. Conclusions: Results of the study suggest that corporate integrity has a significant influence on behaviors of managers. Business ethics reduces the likelihood of managers to overstate financial performance and hide bad news, which leads to the low likelihood of future stock price crashes. Meanwhile, corporate integrity can supplement internal control and legal system in decreasing stock price crash risks.


  1. An, H., & Zhang, T. (2011). Stock price synchronicity, crash risk, and institutional investors. Journal of Corporate Finance, 21(1), 1-15.
  2. Bae, K. H., Kang, J. K., & Kim, J. M. (2002). Tunneling or value added? evidence from mergers by Korean business groups. Journal of Finance, 57(6), 2695-2740.
  3. Barberis, N., & Thaler, R. (2003). A survey of behavioral finance. Handbook of the Economics of Finance, 1(03), 1053-1128.
  4. Bertrand, M., & Mullainathan, M. S. (2002). Ferreting out tunneling: an application to Indian business groups. The Quarterly Journal of Economics, 117(1), 121-148.
  5. Bhattacharya, U., Daouk, H., & Welker, M. (2003). The world price of earnings opacity. The Accounting Review, 78(3), 641-678.
  6. Brockner, J., Siegel, P. A., Daly, J. P., Tyler, T., & Martin, C. (1997). When trust matters: the moderating effect of outcome favorability. Administrative Science Quarterly, 42(3), 558.
  7. Bushman, R. M., Piotroski, J. D., & Smith, A. J. (2004). What determines corporate transparency? Journal of Accounting Research, 42(2), 207-252.
  8. Chan, K. C., Farrell, B. R., & Lee, P. (2008). Earnings management of firms reporting material internal control weaknesses under section 404 of the Sarbanes-Oxley Act. A Journal of Practice & Theory, 27(2), 161-179.
  9. De Long, J. B., Shleifer, A., Summers, L. H., & Waldmann, R. J. (1990). Noise trader risk in financial markets. Journal of Political Economy, 98, 703-738.
  10. Elster, J.(1989). Social Norms and Economic Theory. Journal of Economic Perspectives, 3(4), 99-117.
  11. Fan, G., Wang, X., & Zhu, H.(2011). China's marketization index - relative process of marketization in various regions 2011 report. Beijing: Economic Science Press.
  12. Grullon, G., Michenaud, S., & Weston, J. P. (2015). The real effects of short-selling constraints. Review of Financial Studies, 28(6), 1737-1767.
  13. Hammersley, J. S., Myers, L. A., & Catherine, S. (2008). Market reactions to the disclosure of internal control weaknesses and to the characteristics of those weaknesses under section 302 of the Sarbanes Oxley Act of 2002. Review of Accounting Studies, 13(1), 141-165.
  14. Hutton, A. P., Marcus, A. J., & Tehranian, H. (2009).Opaque financial reports, R2, and crash risk. Journal of Financial Economics, 94(1), 67-86.
  15. Jiang, F., Shi, B., & Li, X.(2015). Is "honest" enterprise honesty? empirical evidence based on earnings management. Accounting Research, (8), 24-31.
  16. Jin, L., & Myers, S. C. (2006). R2 around the world: new theory and new tests. Journal of Financial Economics, 79(2), 257-292.
  17. Joh, S. W. (2003). Corporate governance and firm profitability: evidence from Korea before the economic crisis. Journal of Financial Economics, 68(2), 287-322.
  18. Johnson, S., Porta, R. L., & Shleifer, A. (2000). Tunneling. American Economic Review, 90(2), 22-27.
  19. Kim, J. B., Li, L., Lu, L. Y., & Yu, Y. (2016). Financial statement comparability and expected crash risk. Journal of Accounting & Economics, 61(2-3), 294-312
  20. Kim, J. B., Li Y., & Zhang, L.(2011). CFOs versus CEOs: equity incentives and crashes. Journal of Financial Economics, 101(3), 713-730.
  21. Kim, J. B., & Zhang, L. D.(2012). Accounting conservatism and stock price crash risk: firm-level evidence. Contemporary Accounting Research, 33(1), 412-441.
  22. Kothari, S. P., Shu, S., & Wysocki, P. D. (2009). Do managers withhold bad news? Journal of Accounting Research, 47(1), 241-276.
  23. Mitra, S., Jaggi, B., & Hossain, M. (2013). Internal control weaknesses and accounting conservatism evidence from the Post-Sarbanes-Oxley period. Journal of Accounting Auditing & Finance, 28(2), 152-191.
  24. Morck, R., Yeung, B., & Yu, W. (2000). The information content of stock markets: why do emerging markets have synchronous stock price movements? Journal of Financial Economics, 58(1), 215-260.
  25. Murphy, P. E. (1998). Eighty exemplary ethics statements. Notre Dame: IN: University of Notre Dame Press.
  26. O'Reilly, C., & Chatman, J. (1986). Organizational commitment and psychological attachment: the effects of compliance, identification, and internalization on prosocial behavior. Journal of Applied Psychology, 71(3), 492-499.
  27. Piotroski, J. D., Wong, T. J., & Zhang, T. (2015). Political incentives to suppress negative information: evidence from Chinese listed firms. Journal of Accounting Research, 53(2), 405-459.
  28. Plous, S. (1993). The psychology of judgment and decision making. New York, NY, England: Mcgraw-Hill Book Company.
  29. Putnam, R. (1993).The prosperous community: social capital and public life. The American Prospect, 13(1), 35-42.
  30. Ross, E. A. (1901). Social Control. American Journal of Sociology, 1(5), 513-535.
  31. Sapienza, P., & Zingales, L. (2012). A trust crisis. International Review of Finance, 12(2), 123-131.
  32. Shleifer, A., & Vishny, R. W. (1997). A Survey of corporate governance. Journal of Finance, 52(2), 737-783.
  33. Song, L.(2015). Accounting disclosure, stock price synchronicity and stock crash risk: an emergingmarket perspective. International Journal of Accounting & Information Management, 23(4), 349-363.
  34. Stout, L. (2002).The Investor Confidence Game. Brooklyn Law Review, 68(2), 407-437.
  35. Tian, L., & Wang, K. (2017). The "cover-up effect" of social responsibility information disclosure and the collapse risk of listed companies: DID-PSM analysis from Chinese stock market. Management World, (11), 146-157.
  36. Wang, X., Fan, G., & Yu, J. (2017). China provincial marketization index report 2016. Beijing: Social Science Literature Publishing House.
  37. Wang, Y. (2014). Cultural differences and M&A performance of "honesty and innovation values": based on empirical data of equity M&A events of listed companies in Shanghai and Shenzhen from 2008 to 2010. Accounting Research, (9), 74-80.
  38. Wurgler, J. (2001). Financial markets and the allocation of capital. Journal of Financial Economics, 58(1-2), 187-214.
  39. Xu, N., Jiang, X., Chan, K. C., & Yi, Z. (2013). Analyst coverage, optimism, and stock price crash risk:evidence from china. Pacific Basin Finance Journal, 25, 217-239.
  40. Zhai, S., Li X., & Xu Y. (2015).Enterprise culture and commercial credit: does "honesty" play a role? Contemporary Finance and Economics, (6), 118-128.
  41. Zhang, W. (2001). Property rights, government and credit. Shanghai: Sanlian Bookstore.
  42. Zhang, W., & Ke, R. (2002).Trust and explanation: interprovincial investigation and analysis from China. Economic Research Journal, (10), 59-70+96