CEO early-life disaster experience and stock price crash risk

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Detail(s)

Original languageEnglish
Article number101928
Journal / PublicationJournal of Corporate Finance
Volume68
Online published19 Mar 2021
Publication statusPublished - Jun 2021

Abstract

We study the impact of CEO early-life disaster experience on stock price crash risk. Using a longitudinal sample of U.S. firms, we document that firms led by CEOs with early-life disaster experience have higher stock price crash risk. Our findings are consistent with CEOs who experienced early-life disasters being more risk tolerant, and thus more willing to accept the risks associated with bad news hoarding, engendering formation of stock price crashes. In cross-sectional analyses, we find that the effect of CEO disaster experience is amplified when a CEO has greater equity compensation-based incentives and power over corporate board to hoard bad news. Reinforcing bad news hoarding narrative, we also find that stocks of the firms led by CEOs with early-life disaster experience exhibit stronger asymmetric response to bad versus good news disclosures and are more likely to experience crashes accompanied by breaks in the strings of uninterrupted earnings increases. Further, consistent with early-life disaster experience making CEOs more risk tolerant, we find that firms led by CEOs with early-life disaster experience tend to have higher cash-flow volatility and stock return volatility. Evidence from supplemental analysis suggests that the impact of CEO early-life disaster experience on crash risk varies in a curvilinear manner with the severity of disaster.

Research Area(s)

  • Bad news hoarding, CEO background characteristics, Disaster experience, Stock price crash risk

Citation Format(s)

CEO early-life disaster experience and stock price crash risk. / Chen, Yangyang; Fan, Qingliang; Yang, Xin; Zolotoy, Leon.

In: Journal of Corporate Finance, Vol. 68, 101928, 06.2021.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review