Curbing stock price crash: The bright side of regulatory fragmentation

Abstract

Complementing existing research on the inefficiencies of regulatory fragmentation, this study identifies a potential benefit: firms facing greater regulatory fragmentation experience lower stock price crash risk. Mechanism analyses suggest that such fragmentation enhances financial reporting quality, mitigates stock overpricing, and improves the accuracy of analyst forecasts. Firms subject to regulatory fragmentation also hold more cash and are less likely to pay dividends or repurchase shares. These findings indicate that the reduction in crash risk is associated with improved information disclosure and more conservative financial policies. Consistent with this notion, the effect is more pronounced among firms with high information uncertainty and tight financial constraints. Overall, this study sheds light on the ongoing discussion regarding optimal regulatory oversight schemes.