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

See all articles by Leilei Gu

Leilei Gu

Central University of Finance and Economics (CUFE) - Business School

Xiaoran Ni

Xiamen University - School of Economics; Xiamen University - Wang Yanan Institute for Studies in Economics (WISE)

Yuchao Peng

Central University of Finance and Economics (CUFE) - School of Finance

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

Gu, Leilei and Ni, Xiaoran and Peng, Yuchao, A Tale of Two "Skewness": Managerial Epidemic Experience, Probability Weighting, and Stock Price Crash Risk (February 01, 2024). Social Sciences in China, 2024, Available at SSRN: https://ssrn.com/abstract=3687536 or http://dx.doi.org/10.2139/ssrn.3687536

Leilei Gu

Central University of Finance and Economics (CUFE) - Business School ( email )

Beijing
China

Xiaoran Ni (Contact Author)

Xiamen University - School of Economics ( email )

D204
Economic Building
Xiamen, Fujian 361005
China

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

Xiamen
China

Yuchao Peng

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

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