Board–CEO Trust and Concealing Adverse News
50 Pages Posted: 16 Apr 2024
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: Suggested Citation