Do Non-Family CEOs Decrease Stock Price Crash Risk in Chinese Family Firms?

Employing non-family CEOs in Chinese family firms has become a universal phenomenon. The existing research mainly focuses on the direct effect of non-family CEOs on corporate operation, but ignores the capital market influence despite stock price crash has a more serious damage for family firms due to their reputation concern. To fill this research gap, this paper shed light on the important but ignored capital market effect of non-family members by exploring the role of non-family CEOs on stock price crash risk. Based on 12,561 firm-year observations of listed family firms in China from 2004 to 2020, this study estimates using correlation analysis, multiple regression analysis, entropy balancing matching, treatment effect model and granger causality test. The results show that family firms with non-family CEOs are negatively related with future stock price crash risk in Chinese family firms, and this relationship tends to be stronger when CEOs have more power. Further, to explore the effect mechanism, we isolate the formation of stock price crash risk into two stages: bad news generation and bad news disclosure, and find that non-family CEOs reduce bad news generation but have no impact on bad news disclosure. Additionally, non-family CEOs decrease stock price crash risk when governance mechanisms in family firms are weaker, industry environments are poorer and macroeconomic conditions are more positive. This study highlights the negative effect of non-family CEOs on stock price crash risk in Chinese family firms, firstly clarifies the effect mechanism based on the two stages of stock price crash formation and finds that CEO power strengthens the role of non-family CEOs in lowering stock price crash risk in family firms, which differs from previous studies. Finding of this study also have important implications for the managers and investors of family firms. Family firms are expected to increase the introduction of non-family members and strengthen supervision to formalize governance structure. Meanwhile, investors should also consider the ability and experience of top management teams in family firms.