CEO equity incentive duration and expected crash risk

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

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Detail(s)

Original languageEnglish
Article number101265
Journal / PublicationBritish Accounting Review
Online published6 Oct 2023
Publication statusOnline published - 6 Oct 2023

Abstract

This study examines the effect of CEO equity incentive duration on firm-specific ex ante crash risk. Using a measure that explicitly accounts for the length of stock and option grant vesting terms (Gopalan et al., 2014), we find that longer CEO equity incentive duration reduces investors' perceived crash risk, gauged by the steepness of option implied volatility smirk. This finding holds for alternative measures of duration that account for endogeneity, alternative regression specification with lagged independent variables and using an instrumental variable approach. We further find that this negative relation is more salient for firms whose CEOs have a higher level of career concerns and for firms with weaker external monitoring. Additional tests point to financial reporting obfuscation and over-investment as two possible channels through which the duration–crash risk relation operates. Overall, our results suggest that lengthening CEO equity incentive duration discourages managers from bad news hoarding and continuing negative NPV projects, which reduces a firm's expected crash risk. © 2023 British Accounting Association

Research Area(s)

  • Bad news withholding, Equity incentive duration, Expected crash risk

Bibliographic Note

Full text of this publication does not contain sufficient affiliation information. With consent from the author(s) concerned, the Research Unit(s) information for this record is based on the existing academic department affiliation of the author(s).

Citation Format(s)

CEO equity incentive duration and expected crash risk. / Gu, Zhenjiang; Lu, Louise Yi; Yu, Yangxin.
In: British Accounting Review, 06.10.2023.

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review