Strengthened board monitoring from parent company and stock price crash risk of subsidiary firms

摘要

This article examines whether and how stronger board monitoring in a parent company influences the stock price crash risk of affiliated subsidiary firms. Using a quasi-natural experiment in China, we empirically document that enhanced board monitoring at the parent company helps reduce crash risk in its subsidiary firms. Three channels of this impact are identified: (i) better corporate governance in the parent company can prevent it from tunneling wealth from the subsidiary firm, (ii) better corporate governance in the parent company helps it better monitor the subsidiary firm, and (iii) better corporate governance in the parent company can spill over to the subsidiary firm and thus constrain managers in the subsidiary firm from misconduct in dealing with negative information.