CEO Early-Life Disaster Experience and Stock Price Crash Risk

75 Pages Posted: 31 Jul 2019 Last revised: 9 Mar 2021

See all articles by Yangyang Chen

Yangyang Chen

City University of Hong Kong (CityUHK) - Department of Accountancy

Qingliang Fan

The Chinese University of Hong Kong

Xin Yang

Hong Kong Polytechnic University - School of Accounting and Finance

Leon Zolotoy

University of Melbourne - Melbourne Business School

Date Written: March 9, 2021

Abstract

We study the impact of CEO early-life disaster experience on stock price crash risk. Using a longitudinal sample of U.S. firms, we document that firms led by CEOs with early-life disaster experience have higher stock price crash risk. Our findings are consistent with CEOs who experienced early-life disasters being more risk tolerant, and thus more willing to accept the risks associated with bad news hoarding, engendering formation of stock price crashes. In cross-sectional analyses, we find that the effect of CEO disaster experience is amplified when a CEO has greater equity compensation-based incentives and power over corporate board to hoard bad news. Reinforcing bad news hoarding narrative, we also find that stocks of the firms led by CEOs with early-life disaster experience exhibit stronger asymmetric response to bad versus good news disclosures and are more likely to experience crashes accompanied by breaks in the strings of uninterrupted earnings increases. Further, consistent with early-life disaster experience making CEOs more risk tolerant, we find that firms led by CEOs with early-life disaster experience tend to have higher cash-flow volatility and stock return volatility. Evidence from supplemental analysis suggests that the impact of CEO early-life disaster experience on crash risk varies in a curvilinear manner with the severity of disaster.

Keywords: CEO background characteristics; Disaster experience; Stock price crash risk; Bad news hoarding

JEL Classification: G12; G34; G40

Suggested Citation

Chen, Yangyang and Fan, Qingliang and Yang, Xin and Zolotoy, Leon, CEO Early-Life Disaster Experience and Stock Price Crash Risk (March 9, 2021). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3427936 or http://dx.doi.org/10.2139/ssrn.3427936

Yangyang Chen (Contact Author)

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Qingliang Fan

The Chinese University of Hong Kong ( email )

Hong Kong

HOME PAGE: http://michaelqfan.weebly.com

Xin Yang

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Leon Zolotoy

University of Melbourne - Melbourne Business School ( email )

200 Leicester Street
Carlton, Victoria 3053 3186
Australia

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