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<p>Using a sample of Chinese listed firms for the period 2006–2021, this paper constructs dynamic stock networks annually using symbolization and mutual information methods, and investigates the impact of stock network centrality on one-year-ahead stock price crash risk with the help of the bad news hoarding mechanism. The authors find robust evidence that firms with higher centrality are less likely to experience stock price crashes in the future. An examination of underlying mechanisms suggests that being at the center of the stock network enhances firms’ investment efficiency and managers’ cost of engaging in earnings management, thereby reducing the likelihood of such firms forming and hoarding bad news, and hence their crash risk. Further analysis reveals that the mitigating effect of network centrality on stock price crashes is more salient for firms with weaker external monitoring and less conservative accounting policies. Overall, this paper sheds light on a novel benefit of being at the center of the stock network, namely that central firms are less prone to crash risk, which provides practical insights for risk-management applications related to asset pricing and tail events.</p>

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The Benefit of Being Central: Stock Network Centrality and Stock Price Crashes

  • 期刊论文

  • 发表日期：

    2025年3月13日

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  • Chuangxia Huang,
  • Yanchen Deng,
  • Xiaoguang Yang,
  • Yaqian Cai,
  • Xian Zhao

摘要

Using a sample of Chinese listed firms for the period 2006–2021, this paper constructs dynamic stock networks annually using symbolization and mutual information methods, and investigates the impact of stock network centrality on one-year-ahead stock price crash risk with the help of the bad news hoarding mechanism. The authors find robust evidence that firms with higher centrality are less likely to experience stock price crashes in the future. An examination of underlying mechanisms suggests that being at the center of the stock network enhances firms’ investment efficiency and managers’ cost of engaging in earnings management, thereby reducing the likelihood of such firms forming and hoarding bad news, and hence their crash risk. Further analysis reveals that the mitigating effect of network centrality on stock price crashes is more salient for firms with weaker external monitoring and less conservative accounting policies. Overall, this paper sheds light on a novel benefit of being at the center of the stock network, namely that central firms are less prone to crash risk, which provides practical insights for risk-management applications related to asset pricing and tail events.