Stock Crash Risk and the Independent Board Leadership Structure

Abstract

We find that the independent board leadership structure, where an independent director holds the board chairperson position, significantly reduces stock crash risk, especially in firms with high monitoring needs. Firms with this board structure appoint more financial experts to their audit committees, undergo fewer earnings restatements, and exhibit fewer unexpected negative earnings releases. Such firms are also more likely to replace CEOs if the firm experiences a stock crash. Our findings underscore the critical role of independent board leadership in mitigating stock crash risk, bolstering the argument for its broader adoption in corporate governance. 1

Keywords: JEL Classification: D89, G12, G17, G32, G34 independent chairperson, crash risk, corporate governance, board structure, CEO power