A Tale of Two "Skewness": Managerial Epidemic Experience, Probability Weighting, and Stock Price Crash Risk
Social Sciences in China, 2024
22 Pages Posted: 9 Sep 2020 Last revised: 19 Feb 2025
Date Written: February 01, 2024
Abstract
Under probability weighting, entrepreneurs with skewness preference tend to seek right-skewed and avoid left-skewed risks. We show that Chinese firms managed by CEOs with professional epidemic experience, i.e., who previously experienced the outbreak of SARS during their tenure as high executives, have lower stock price crash risk measured by the negative skewness of stock prices in subsequent periods. In particular, those firms intentionally avoid stock price crashes by adopting more conservative strategies in decision making. Overall, we provide the first evidence on the unintended effect of entrepreneurs' subjective judgments of the probabilities of disease outbreaks on financial market stability, which have long-term implications on the financial system.
Keywords: Severe Acute Respiratory Syndrome (SARS), Epidemic Experience, Probability Weighting, Skewness Preference, Stock Price Crash Risk
JEL Classification: G30; G34; G38
Suggested Citation: Suggested Citation