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How do powerful decision-makers affect firm's stock price crash risk?

Author

Listed:
  • Ramzi Benkraiem

    (Audencia Business School, France)

  • Florence Depoers

    (Paris Nanterre University, Nanterre, France)

  • Assil Guizani

    (Paris Nanterre University, Nanterre, France)

  • Faten Lakhal

    (Léonard de Vinci Pôle Universitaire, Research Center, 92916 Paris La Défense, France)

Abstract

This paper investigates the effect of decision-makers' power on the stock price crash risk (SPCR). Using a sample of French listed companies, the results show that SPCR increases with the power of decision-makers in widely held and more concentrated ownership structures. This result suggests that for expropriation purposes, powerful managers and controlling shareholders conceal bad news for extended periods. Up to a threshold, bad news is released to investors all at once, leading to a drop in the stock prices. We also find that analysts' coverage mitigates the effect of powerful managers on SPCR in widely held firms. However, the relationship between the power of controlling shareholders and SPCR is less prevalent in companies with independent boards. These findings highlight the importance of efficient governance devices to curb opportunistic decision-makers and protect the interests of external shareholders. However, the effectiveness of these mechanisms depends on the identity of the decision-maker and the nature of agency problems.

Suggested Citation

  • Ramzi Benkraiem & Florence Depoers & Assil Guizani & Faten Lakhal, 2021. "How do powerful decision-makers affect firm's stock price crash risk?," Economics Bulletin, AccessEcon, vol. 41(3), pages 1876-1886.
    • Handle: RePEc:ebl:ecbull:eb-21-00292
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    References listed on IDEAS

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    More about this item

    Keywords

    Power; Stock price crash risk; Decision-makers; Analyst's coverage; Independent directors.;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics

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