Are Corporate General Counsels in Top Management Effective Monitors? Evidence from Stock Price Crash Risk

Abstract

We find that firms with a top management counsel (TMC) have lower stock price crash risk than other firms. We further show that firms with a TMC issue more negative relative to positive earnings guidance and use more negative relative to positive words in their annual report filings, compared to firms without a TMC. TMCs are more effective in mitigating crash risk when they serve on the board. Our findings support the monitoring role of TMCs in mitigating bad news hoarding, which, in turn, contributes to the reduction in crash risk.

Keywords: Corporate general counsel, Discretionary accruals, Opaque financial reports, Stock price crash risk

JEL Classification: M41, M51, G34, G14