Does commercial reform embracing digital technologies mitigate stock price crash risk?

Abstract

Over the recent decade or so, the Chinese government implemented a commercial reform that features governmental application of digital technologies to acquire and process firm information. The core objective of commercial reform is to improve information transparency and monitoring on corporate commercial activities. To explore the economic effectiveness of the reform, we examine how it impacts firms' stock price crash risk. We find robust evidence that the commercial reform that digitalizes government regulatory activities mitigates stock price crash risk and achieves so via enhancing information environment and monitoring for firms. This finding is more prominent for firms with higher levels of digitalization and innovation and those with weaker internal governance. Overall, our findings highlight a potential benefit of applying digital technologies to regulatory reform, encouraging governments to adopt digital tools to improve information environments and monitoring for firms, and thereby promoting a more stable and efficient capital market.