Abstract

We examine whether the level of integrity in a society, i.e., social integrity, affects stock price crash risk. We explore two competing hypotheses. On the one hand, exposure to high levels of integrity may reduce managers’ incentives to obfuscate information, thereby leading to lower crash risk. On the other hand, social integrity may weaken outsiders’ monitoring of managerial behaviors, thus giving managers more opportunities to obfuscate information and, consequently, leading to higher crash risk. Using a sample of Chinese listed firms, we find that firms located in regions with higher integrity have lower future stock price crash risk. This result is confirmed by a difference-in-difference analysis with an exogenous shock to social integrity. Further analysis suggests that increased information transparency is a potential channel through which social integrity affects stock price crash risk. Cross-sectional analyses suggest that the negative effect of social integrity on crash risk is more pronounced in firms with weaker internal control systems and firms with less negative media coverage. Overall, our study provides novel evidence that the ethical environment plays a significant role in shaping business ethics and influencing stock price crash risk.