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Lesson from stock price crash: Changes in managerial confidence and incentives

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  • Kim, Hyeong Joon

Abstract

This paper investigates the consequences of stock price crashes. I find that stock price crash risk subsequently reduces managerial confidence levels, as proxied by the CEO's option-based and earnings call transcript's text-based measures. I also find that stock price crash risk reduces CEO compensation and equity incentives, suggesting that a firm seeks to adjust managerial incentives after its stock price crashes to prevent future occurrences. Furthermore, CEOs with high confidence are more likely to curtail overinvestment after their crash experiences relative to others, thereby contributing to shareholder value. Overall, this paper provides novel evidence that CEOs and firms appear to learn from their experiences of stock price crashes, suggesting that stock price crashes may induce experience-driven conservatism that influences CEO and corporate decisions.

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  • Kim, Hyeong Joon, 2025. "Lesson from stock price crash: Changes in managerial confidence and incentives," The British Accounting Review, Elsevier, vol. 57(3).
    • Handle: RePEc:eee:bracre:v:57:y:2025:i:3:s0890838924002798
    DOI: 10.1016/j.bar.2024.101499
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    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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