City doing-business environment and stock price crash risk

Abstract

By constructing a city-level Doing Business Environment Index for China from 2011 to 2022 and analyzing A-share listed firms, this paper finds that improvements in the local doing-business environment reduce the risk of stock price crashes for local firms. This effect is more pronounced for firms with greater government influence, weaker corporate governance, and higher potential risk. During the COVID-19 pandemic, a better doing-business environment helps offset the negative impacts of the outbreak in non-central cities. Furthermore, an improved doing-business environment mitigates the increase in crash risk associated with policy changes, promotes the standardization of business practices, and enhances information transparency, thereby reducing both the emergence and concealment of negative news. These findings suggest that a favorable doing-business environment can effectively counteract the adverse effects of local government intervention on firms.