China’s Closed Pyramidal Managerial Labor Market and the Stock Price Crash Risk
Donghua Chen
Nanjing University
Jeong-Bon Kim
City University of Hong Kong and University of Waterloo
Oliver Zhen Li
National University of Singapore and Shanghai Lixin University of Accounting and Finance
Shangkun Liang
Central University of Finance and Economics
THE ACCOUNTING REVIEW

ABSTRACT: Managers of China’s state-owned firms work in a closed pyramidal managerial labor market. They
enjoy non-transferable benefits if they choose to stay within this system. The higher up are they in this labor market
hierarchy (their political ranks), the fewer are their outside employment opportunities. Due to career and wealth
concerns, they are cautious and risk-averse when managing firms. We examine the effect of managers’ political
ranks on firms’ stock price crash risk and find a negative association. This association mainly exists in firms with
younger managers and managers with shorter tenure. Further, this effect is only significant in regions with weak
market forces, in firms without foreign investors, without political connections, and during periods with no local
government leaders’ or managers’ political promotions. We conclude that the political ranking system reduces the
stock price crash risk.