When Bad News Is Good News: Implicit Government Guarantees and Stock Price Crash Risk

Applied Economics. 2026.

Zhao Z., Ma J., Bian Y., Wang J.

This study examines whether the weakening of implicit government guarantee expectations in China’s public credit market affects stock price crash risk. Using the March 2014 shock that first challenged rigid-repayment expectations, we estimate a difference-in-differences model. Crash risk falls significantly among firms that had issued public credit-market debt before the shock. Mechanism tests show earlier incorporation of adverse earnings news and stronger predictive power of bond spreads for subsequent stock returns, indicating greater bond-to-stock spillover of downside information. We also find more downside information from analysts, the media, and online investors, alongside better bad-news disclosure, timelier loss recognition, and faster reporting. The decline in crash risk is evident for both state-owned and non-state-owned enterprises, with larger estimates for state-owned enterprises. It is also stronger for firms in provinces with greater fiscal pressure, locally important firms, financially constrained firms, and exchange-market issuers. These findings identify implicit government guarantee expectations as an institutional force shaping cross-market price discovery and equity-market tail risk.

Keywords: Stock Price Crash Risk, Implicit government guarantees, Rigid-repayment expectations, Bond-to-stock information spillover, Bad-news disclosure, Неявные государственные гарантии, ожидания жёсткого погашения, информационные переливы с рынка облигаций на рынок акций, раскрытие негативной информации, риск обвала цен на акции

Publication based on the results of: Institutions, human capital and regional Development: historical analysis and contemporary challenges (2025)