Powerful CEOs and stock price crash risk |
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| Affiliation: | 1. School of Business, Renmin University of China, Beijing 100872, China;2. School of Public Finance, Central University of Finance and Economics, Beijing 100081, China;3. Department of Accounting, University of Melbourne, Melbourne, VIC 3010, Australia;4. Gordon Ford College of Business, Western Kentucky University, Bowling Green, KY 42101, Kentucky, United States;1. Essex Business School, University of Essex, UK;2. Durham University Business School, Durham University, UK;1. School of Business, Renmin University of China, China;2. School of Accountancy, Central University of Finance and Economics, China;3. Business School, Hunan University, No. 109 Shijiachong Road, Yuelu District, Changsha, Hunan 410006, China;1. School of Accountancy, Central University of Finance and Economics, 39 South College Road, Haidian District, Beijing, 100081, China;2. Gabelli School of Business, Fordham University, 113 West 60th Street, New York, NY, 10023, United States;1. College of Business Economics, Qatar University, Doha, Qatar;2. Gerald Schwartz School of Business, St. Francis Xavier University, Antigonish, Nova Scotia, Canada |
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| 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. |
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