Powerful CEOs and stock price crash risk

Md Al Mamun, Balasingham Balachandran, Huu Nhan Duong

Research output: Contribution to journalArticleResearchpeer-review

6 Citations (Scopus)

Abstract

We find that powerful chief executive officers (CEOs) are associated with higher crash risk. The positive association between CEO power and crash risk holds when controlling for earnings management, tax avoidance, chief executive officer's option incentives, and CEO overconfidence. Firms with powerful CEOs have higher probability of financial restatements, lower proportion of negative to positive earnings guidance, and lower ratio of negative to positive words in their financial statements. The association between powerful CEOs and higher crash risk is mostly evident among firms with higher sensitivity of CEO wealth to stock prices and when CEOs have lower general skills. External monitoring mechanisms weaken but do not eliminate the association between powerful founder CEOs and higher crash risk.

Original languageEnglish
Article number101582
Number of pages25
JournalJournal of Corporate Finance
Volume62
DOIs
Publication statusPublished - Jun 2020

Keywords

  • CEO general skills
  • CEO overconfidence
  • CEO power
  • Corporate governance
  • Delta
  • Stock price crash risk

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