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CEO spin and the stock price crash

Author

Listed:
  • Liu, Bin
  • Zhou, Xuemei

Abstract

This study develops a model elucidating the mechanism by which CEO exaggeration triggers stock price collapses. CEOs leverage private information to attract investment through premarket boasting. Two investor archetypes interpret this information differently: Type I investors, possessing superior analytical capabilities, accurately discern true value; Type II investors, who rely on CEO pronouncements, may overestimate firm worth. Equilibrium prices depend on stock payoff, CEO boasting, and market liquidity. The model demonstrates that equilibrium prices exhibit a nonlinear dependence on the extent to which investors focus on CEO boasting, potentially culminating in a stock price collapse.

Suggested Citation

  • Liu, Bin & Zhou, Xuemei, 2025. "CEO spin and the stock price crash," Finance Research Letters, Elsevier, vol. 81(C).
    • Handle: RePEc:eee:finlet:v:81:y:2025:i:c:s1544612325007093
    DOI: 10.1016/j.frl.2025.107449
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    References listed on IDEAS

    as
    1. Lin Peng & Ailsa Röell, 2014. "Managerial Incentives and Stock Price Manipulation," Journal of Finance, American Finance Association, vol. 69(2), pages 487-526, April.
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    Keywords

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General

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