Artificial Intelligence as a Risk Control Mechanism: Corporate Governance and Firm Downside Risk in China

Artificial intelligence (AI) is increasingly adopted in firms’ information, control, and risk management systems, yet its implications for downside risk remain unclear. This study examines the association between AI investment and firm-level downside risk using panel data on Chinese non-financial listed firms from 2016 to 2024. Downside risk is measured using stock price crash risk. The results show that AI investment is negatively associated with crash risk. This finding is consistent with the view that improved internal information processing reduces the accumulation of undisclosed negative information. We further examine the role of corporate governance and find that the negative association is stronger in firms with higher executive ownership and weaker in firms with greater CEO power. Additional analyses suggest that improvements in the information environment are one channel through which AI investment is associated with lower firm risk. Overall, These findings suggest that AI investment can support firm-level risk control by improving internal monitoring and information processing, but its effectiveness depends on governance arrangements that shape managerial incentives and oversight. JEL:G32, G34, O33, G14