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The increasing number of subsidiaries and stock price crash risk: evidence from the Chinese stock market

Saisai Li (Department of Accounting, Zhongkai University of Agriculture and Engineering, Guangzhou, China)
Qianhua Lei (Department of Accounting, The School of Business and Administration, South China University of Technology, Guangzhou, China)
Liuyang Ren (Department of Accounting, School of Accounting, Guangdong University of Foreign Studies, Guangzhou, Guangdong)

Pacific Accounting Review

ISSN: 0114-0582

Article publication date: 8 August 2022

Issue publication date: 9 January 2023

169

Abstract

Purpose

With the development of the economy, an increasing number of listed companies form subsidiaries in China. Though the increase in the number of subsidiaries affects the hierarchical structure and risk of conglomerates, few studies relate the hierarchical relationship between the parent company and its subsidiaries to its capital market performance at the conglomerate level. Therefore, this study aims to investigate the relationship between the number of subsidiaries and crash risk.

Design/methodology/approach

Using a sample of all the A-share companies in the Shanghai and Shenzhen stock markets from 2007 to 2015, this study conducts multivariate regression analyses between the number of subsidiaries and the stock price crash risk.

Findings

This study finds an inversed U relationship between the number of subsidiaries and the stock price crash risk, and the above inversed U relationship is steeper in conglomerates with stronger managerial power and less finance distress.

Originality/value

This research has an incremental contribution to the agency problem and governance effect of the parent–subsidiary system in conglomerates. To the best of the authors’ knowledge, this is the first study to show a significant quadratic relationship between the future crash risk and the number of subsidiaries. This paper provides new evidence that the number of subsidiaries has an incremental ability to predict future firm-specific crash risk above other predictors identified by previous research.

Keywords

Acknowledgements

This work was supported by the National Natural Science Foundation of China under Grant Nos. 72072060, 71902043 and 71602059; Guangdong Soft Science Research Project under Grant No. 2020A1010020004; The Joint Project of Philosophy and Social Science Development of Guangzhou in 2020 in the 13th Five-Year Plan under Grant No. 2020GZGJ11 and Fundamental Research Funds for the Central Universities of China under Grant No. XYMS202104.

Citation

Li, S., Lei, Q. and Ren, L. (2023), "The increasing number of subsidiaries and stock price crash risk: evidence from the Chinese stock market", Pacific Accounting Review, Vol. 35 No. 1, pp. 105-125. https://doi.org/10.1108/PAR-07-2021-0120

Publisher

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Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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