Summary: Financial innovation continually provides the impetus for financial development. Accelerating financial innovation is essential to advancing comprehensive financial reforms and can also be an effective catalyst for increasing resource allocation efficiency and propelling high-quality economic development. In the context of rapidly constructing a new development pattern and striving for high-quality growth in China, the question of how to balance the relationship between financial innovation and financial risk has become significant.
Exchange-traded funds (ETFs) are among the most popular and important financial innovations of recent years. However, although ETFs have proven to be valuable, they have had adverse effects on the stability of the financial market. For example, following the “flash crash” in the U.S. market on May 6, 2010, various publications such as the Kauffman Report attributed the cause of the stock price flash crash to the short selling mechanism of ETFs, and argued that ETFs exacerbate panic selling and trigger systemic risk. ETFs have become increasingly popular among investors in China. However, given the vast differences between China's A-share market and those of Western countries in terms of investor structure, trading systems, and corporate governance, whether financial innovations like ETFs may have unforeseen negative effects on underlying stocks and the financial market requires further examination.
Chinese listed companies play an essential role in maintaining the stability of the financial market through steady stock price development. However, stock price crashes are not uncommon. These crashes generally undermine shareholder rights and investor confidence, leading to a lack of stability in market operation. In a complex and interconnected financial system, the price plunge of a single stock can potentially trigger a domino effect damaging financial market stability. Against this backdrop of rapid ETF growth and frequent stock price crash risk, the question arises of whether the two phenomena are related. If ETFs exert a negative impact on the stock price crash risk of their constituent stocks, what are the underlying mechanisms？ These questions serve as crucial entry points for exploring the relationship between financial innovation and financial risk.
Thus, in this study we investigate non-financial companies listed on the A-share market between 2006 and 2019, with data sourced from the Wind and CSMAR databases. We examine whether and how the proportion of ETF holdings affects the stock price crash risks in listed companies, and thus explore the relationship between financial innovation and financial risk. We find that an increase in the ETF ownership ratio intensifies stock price crash risk. Channel analyses show that ETF ownership enhances stock liquidity, thereby attracting more short-term investors and enticing management to conceal negative company news. When accumulated negative news is collectively released, it can trigger a stock price crash. However, external factors such as the imperfect A-share pricing mechanism and analysts' optimistic bias are not the primary reasons for the increased risk of stock price crashes due to ETFs. We also find that the effect of ETFs on stock price crash risk is even more pronounced in companies with more severe agency conflicts, poorer corporate governance, and a higher degree of information asymmetry.
This study makes three main contributions. First, by focusing on the corporate governance of micro-level listed companies, we demonstrate that although financial innovation improves stock liquidity, it also fosters opportunistic tendencies in management, ultimately leading to stock price crashes. Our study not only extends the ETF and stock price crash risk literature but also extends the research perspectives by providing local empirical evidence concerning the relationship between financial innovation and financial risk. Second, we construct the instrumental variable based on the adjustment of CSI 300 and CSI 500 indexes, and we test the relationships between various types of ETF ownership ratios and stock price crash risk. These can help deal with potential endogeneity issues and enables us to accurately identify the causal effect of the ETF ownership ratio on stock price crash risk. Third, the study identifies poor corporate governance in the company itself as the underlying mechanism through which ETFs increase stock price crash risk. This indicates that improving corporate governance not only has positive implications for the sustainable development of a company but also has considerable value in terms of maintaining the stability of the financial market. Regulatory authorities can prevent factors from destabilizing the macro financial market by focusing on the governance of micro-level enterprises, thereby contributing to the high-quality development of the economy and the stability of the financial market. Keywords: Stock Liquidity Stock Price Crash Risk Corporate Governance 孙广宇, 李志辉, 杜阳, 王近. 市场操纵降低了中国股票市场的信息效率吗——来自沪市A股高频交易数据的经验证据 [J]. 金融研究, 2021, 495(9): 151-169. 郭照蕊, 黄俊. 高铁时空压缩效应与公司权益资本成本——来自A股上市公司的经验证据 [J]. 金融研究, 2021, 493(7): 190-206. 杜兴强, 张颖. 独立董事返聘与公司违规:“学习效应”抑或“关系效应”？ [J]. 金融研究, 2021, 490(4): 150-168. 林志帆, 杜金岷, 龙晓旋. 股票流动性与中国企业创新策略:流水不腐还是洪水猛兽？ [J]. 金融研究, 2021, 489(3): 188-206. 王丹, 孙鲲鹏, 高皓. 社交媒体上“用嘴投票”对管理层自愿性业绩预告的影响 [J]. 金融研究, 2020, 485(11): 188-206. 叶康涛, 刘芳, 李帆. 股指成份股调整与股价崩盘风险:基于一项准自然实验的证据 [J]. 金融研究, 2018, 453(3): 172-189. 李春涛, 刘贝贝, 周鹏, 张璇. 它山之石:QFII与上市公司信息披露 [J]. 金融研究, 2018, 462(12): 138-156. 吴超鹏, 张媛. 风险投资对上市公司股利政策影响的实证研究 [J]. 金融研究, 2017, 447(9): 178-191. 宋献中, 胡珺, 李四海. 社会责任信息披露与股价崩盘风险——基于信息效应与声誉保险效应的路径分析 [J]. 金融研究, 2017, 442(4): 161-175. 陈辉, 顾乃康. 新三板做市商制度、股票流动性与证券价值 [J]. 金融研究, 2017, 442(4): 176-190. 冯根福, 刘虹, 冯照桢, 温军. 股票流动性会促进我国企业技术创新吗？ [J]. 金融研究, 2017, 441(3): 192-206. 张晓宇, 徐龙炳. 限售股解禁、资本运作与股价崩盘风险 [J]. 金融研究, 2017, 449(11): 158-174. 孙淑伟, 梁上坤, 阮刚铭, 付宇翔. 高管减持、信息压制与股价崩盘风险 [J]. 金融研究, 2017, 449(11): 175-190.