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Married CEOs and stock price crash risk

Journal: European Financial Management

Date: 2022

Author: Jeong-Bon Kim, Shushu Liao, Yangke Liu

Abstract:
This study examines whether marriage, as a social construct and cultural norm, can affect firm-level stock price crash risk. We find that firms managed by married CEOs are associated with lower future stock price crash risk, after controlling for a set of firm characteristics and CEO traits. We document that CEO marriage reduces crash risk by curbing bad news hoarding and formation activities. Moreover, the attenuating impact of CEO marriage on crash risk is more pronounced among firms with weaker corporate governance and those run by less prominent, higher-delta and lower-paid CEOs.

Link: Google Scholar

Background and Context

Research Problem

This study examines whether CEO marital status influences firm-level stock price crash risk by affecting managers' tendency to withhold bad news from investors.

Dataset

Analysis of 16,042 US public firm-year observations from 1993-2008, examining relationship between CEO marital status and stock price crashes.

Methodology

Statistical analysis comparing crash risk between firms with married vs single CEOs, controlling for firm characteristics and CEO traits.

Declining Trend in Married CEOs as Crash Risk Increases (1993-2008)

  • Shows inverse relationship between proportion of married CEOs and crash risk over time
  • Married CEO percentage declined from 90.6% in 1993 to 77.3% in 2008
  • Crash risk increased from 16.3% in 1993 to 28.7% in 2008

Lower Crash Risk in Firms with Married CEOs

  • Firms with married CEOs show 25.3% lower probability of stock price crashes
  • Based on propensity score matched sample of 2,581 firm pairs
  • Difference is statistically significant at 1% level

Impact of Marriage on Corporate Governance Effectiveness

  • Marriage effect is stronger in firms with weak corporate governance
  • 19% reduction in crash risk for weak governance vs 6.5% for strong governance
  • Suggests marriage acts as informal governance mechanism

CEO Marriage Impact on Conservative Accounting

  • Married CEOs adopt more conservative accounting policies (+0.009)
  • Married CEOs show less overinvestment (-0.016)
  • Both effects help reduce crash risk through better risk management

CEO Compensation and Marriage Effect on Crash Risk

  • Marriage effect is stronger for CEOs with lower compensation
  • 17.5% reduction in crash risk for low-paid CEOs vs 13.4% for high-paid CEOs
  • Suggests marriage matters more when financial incentives are weaker

Contribution and Implications

  • First study to link CEO marital status to stock price crash risk through bad news hoarding behavior
  • Provides evidence that marriage acts as an informal governance mechanism reducing agency problems
  • Offers practical implications for investors in predicting crash risk based on CEO characteristics

Data Sources

  • Trend Chart: Based on Table 1 showing yearly proportions of married CEOs and crash risk
  • Crash Risk Chart: Based on Table 6 Panel (b) showing average treatment effects
  • Governance Chart: Based on Table 9 showing cross-sectional analysis results
  • Accounting Chart: Based on Table 8 showing effects on accounting conservatism and overinvestment
  • Compensation Chart: Based on Table 10 Panel (a) showing CEO compensation effects