Flying at High Altitudes: Sensation-seeking CEOs and Stock Price Crash Risk

Abstract

Using CEOs' pilot licenses to proxy for sensation-seeking personality trait, we show that firms with sensation-seeking CEOs exhibit higher stock price crash risk. This result holds after using several approaches to address endogeneity concerns. We explain this result by showing that sensation-seeking CEOs are more likely to hide bad news by using real earnings management and format bad news by choosing operating segments with higher systematic risk. We find that investors overestimate the abilities of these CEOs upon their appointment and that the crash risk is significant only in the presence of firm misvaluation, lower managerial ability, and lower competition threats. Taken together, our results suggest that sensation-seeking CEOs are more likely to shift their risk preference from idiosyncratic risk to systematic risk due to their career concerns, which may be less likely to create firm value and more likely to increase future stock price crash risk.

Keywords: Sensation-seeking CEOs, Stock price crash risk, Bad news withholding.

JEL Classification: G32, G34, G40