Powerful decision-makers and stock price crash risk
Résumé
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 concentrated ownership structure. 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 the 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 decision-maker and the nature of agency problems.