Board–CEO Trust and Concealing Adverse News

50 Pages Posted: 16 Apr 2024

See all articles by Kee-Hong Bae

Kee-Hong Bae

York University - Schulich School of Business

Sadok El Ghoul

University of Alberta - Campus Saint-Jean

Zhaoran Gong

Xi'an Jiaotong-Liverpool University (XJTLU) - International Business School Suzhou

Omrane Guedhami

University of South Carolina - Moore School of Business

Lixin (Nancy) Su

The Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: April 5, 2024

Abstract

We investigate the effect of board–CEO trust on CEOs’ tendency to hoard bad news. We find a significant positive relationship between board–CEO trust and stock price crash risk, a common proxy for hoarding bad news. This result is robust to using alternative measures of stock price crash risk, alternative samples, and alternative measures of board–CEO trust. We further find that the asymmetry in stock market reactions to good news versus bad news is more pronounced among firms with high board–CEO trust compared with those with low board–CEO trust and that companies with high (vs. low) board–CEO trust are more prone to misrepresenting their true financial situation in their statements, leading to a higher incidence of future restatements. These findings suggest that high board–CEO trust contributes to managers’ tendency to hoard bad news.

Keywords: Board–CEO Trust, Crash Risk, Bad News Hiding

JEL Classification: G14, G34, G41, M12

Suggested Citation

Bae, Kee-Hong and El Ghoul, Sadok and Gong, Zhaoran and Guedhami, Omrane and Su, Lixin (Nancy), Board–CEO Trust and Concealing Adverse News (April 5, 2024). Available at SSRN: https://ssrn.com/abstract=4785062 or http://dx.doi.org/10.2139/ssrn.4785062

Kee-Hong Bae

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 ext) 20248 (Phone)
416-736-5687 (Fax)

Sadok El Ghoul (Contact Author)

University of Alberta - Campus Saint-Jean ( email )

Edmonton, Alberta T6G 2R3
Canada
780-465-8725 (Phone)
780-465-8760 (Fax)

Zhaoran Gong

Xi'an Jiaotong-Liverpool University (XJTLU) - International Business School Suzhou ( email )

111 Ren'ai Road
Suzhou Industrial Park
Suzhou, Jiangsu 215123
China

Omrane Guedhami

University of South Carolina - Moore School of Business ( email )

Columbia, SC
United States

Lixin (Nancy) Su

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

M730, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong
852-2766-7772 (Phone)
852-2330-9845 (Fax)

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