Powerful CEOs and Stock Price Crash Risk

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