CEO Early-Life Disaster Experience and Stock Price Crash Risk
61 Pages Posted: 31 Jul 2019 Last revised: 9 Aug 2019
Date Written: July 28, 2019
Prior literature shows that experiences of traumatic events have long-lasting effects on individuals’ risk attitudes. Integrating these insights with the research examining formation of stock price crashes, we study the impact of CEOs’ early-life natural disaster experiences on stock price crash risk. We document that stocks of the firms led by CEOs with early-life natural disaster experiences have higher crash risk. The documented effect of CEO disaster experience is amplified for CEOs with high equity risk-taking incentives and CEOs serving as the chairman of the board. Further evidence suggests that CEOs with early-life disaster experience, on average, show greater tendency to hoard bad news. Additional analysis reveals a non-monotone relation between the severity of CEO disaster experience and crash risk. Collectively, our findings are consistent with the notion that early-life disaster experience impacts a CEO’s subjective assessment of risks associated with bad news hoarding, engendering formation of stock price crashes.
Keywords: CEO early-life disaster experience; Stock price crash risk; Bad news hoarding
JEL Classification: G12; G14; G40
Suggested Citation: Suggested Citation