Are Corporate General Counsels Effective Monitors - Evidence from Stock Price Crash Risk?

Abstract

Motivated by recent interests and contrasting evidence on the role of corporate general counsels (CGCs) in financial reporting practices, we examine the effect of the presence of CGCs in the top management on stock price crash risk. We find that firms with CGCs in the top management have lower stock price crash risk than others, indicating support for the monitoring role of CGCs. Our results hold addressing for endogeneity concerns and omitted variable bias. Further, we show that CGCs are more effective in mitigating crash risk when they connected to the board. Moreover, we show that the ability of CGCs in reducing overinvestment is a channel through which CGCs mitigate crash risk. Finally, consistent with the idea that first time appointment of CGCs in firms with highly opaque financial reporting are more likely to release bad news, we find that the first-time appointment of CGC is associated with higher crash risk.

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

JEL Classification: M41, M51, G34, G14