Over the recent decade or so, the Chinese government implemented a commercial reform that features governmental application of digital technologies to acquire and process firm information. The core objective of commercial reform is to improve information transparency and monitoring on corporate commercial activities. To explore the economic effectiveness of the reform, we examine how it impacts firms' stock price crash risk. We find robust evidence that the commercial reform that digitalizes government regulatory activities mitigates stock price crash risk and achieves so via enhancing information environment and monitoring for firms. This finding is more prominent for firms with higher levels of digitalization and innovation and those with weaker internal governance. Overall, our findings highlight a potential benefit of applying digital technologies to regulatory reform, encouraging governments to adopt digital tools to improve information environments and monitoring for firms, and thereby promoting a more stable and efficient capital market.

ABSTRACT We study whether sell-side financial analysts’ social ties to firm management help them discern firms’ financial reporting frauds and, upon such detection, how the connected analysts disseminate the information. Using unique data from China, we find that, although unconnected analysts do not manifest a significant change in their likelihood of covering the fraud firms nor in issuing more downgrade stock ratings, connected analysts are significantly more likely to drop coverage right after these firms’ first annual reports containing fraudulent information. Meanwhile, mutual funds with a trading commission relationship to these connected analysts (i.e., client funds) are significantly more likely to unload their holdings of fraud firms than nonclient funds after these firms’ first fraudulent annual reports. Overall, the evidence suggests that analysts with social ties to firm management have early access to bad news and choose to privately communicate the negative information to their clients. Data Availability: All data used in this article are publicly available.