LAUSR

Equity index futures are often blamed for exacerbating equity price crash risk although there is little empirical evidence to support the accusation in the literature. We find that Chinese equity index futures trading significantly reduces stock price crash risk. This negative relationship is strengthened by institutional ownership and weakened by a controlling shareholders’ incentive to elude external monitoring, such as the divergence of control and cash‐flow rights of dominant shareholders, the block holdings of the largest shareholders, and state ownership. Our findings reveal the positive externality of financial derivative innovation on equity market stability.