Abstract

This paper studies how the human capital embedded in rank-and-file employees affects firms’ stock price crash risk. Employing a unique setting in China where we measure human capital using employee information at the firm level, we show that human capital quality improves firms’ internal information environments, curbs bad-news hoarding and overinvestment, leading to lower stock price crash risk. The findings are robust to instrumental variable regressions. Our study highlights the internal informational role of human capital and sheds light on its implications for capital markets and outside investors. Therefore, we contribute to the literature on the interaction between non-shareholding stakeholders and shareholders.