Powerful CEOs and Stock Price Crash Risk

70 Pages Posted: 20 Jun 2016 Last revised: 10 Jan 2019

See all articles by Md Al Mamun

Md Al Mamun

La Trobe University - Department of Economics and Finance

Balasingham Balachandran

La Trobe University - School of Economics and Finance; Financial Research Network (FIRN)

Huu Nhan Duong

Monash University - Department of Banking and Finance; Financial Research Network (FIRN)

Date Written: January 9, 2019

Abstract

We find that chief executive officer (CEO) power increases crash risk. Our results hold addressing for endogeneity concern by instrumental regression analysis; difference-in-difference analysis using exogenous CEO turnover events; firm fixed effects; and propensity score matching approach. Firms with powerful CEOs have higher probability of financial restatement; lower proportion of negative to positive earnings guidance or negative to positive words in their financial statements. Powerful CEOs increase crash risk when their personal wealth is more sensitive to stock prices, and when they possess lower general skills. External monitoring mechanisms weaken but do not eliminate the effect of powerful founder CEOs.

Keywords: CEO power, CEO option delta, CEO overconfidence, CEO general skills, stock price crash risk, corporate governance.

JEL Classification: G12, G32, G34

Suggested Citation

Al Mamun, Md and Balachandran, Balasingham and Duong, Huu Nhan, Powerful CEOs and Stock Price Crash Risk (January 9, 2019). FIRN Research Paper No. 2791707. Available at SSRN: https://ssrn.com/abstract=2797107 or http://dx.doi.org/10.2139/ssrn.2797107

Md Al Mamun

La Trobe University - Department of Economics and Finance ( email )

Melbourne, 3086

Balasingham Balachandran (Contact Author)

La Trobe University - School of Economics and Finance ( email )

La Trobe University
Bundoora, Vic, 3086
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Huu Nhan Duong

Monash University - Department of Banking and Finance ( email )

Melbourne
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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