Married CEOs and stock price crash risk

• Published date: 01 November 2022
• Author: Jeong‐Bon Kim,Shushu Liao,Yangke Liu
• Date: 01 November 2022
• DOI: http://doi.org/10.1111/eufm.12343

DOI: 10.1111/eufm.12343

ORIGINAL ARTICLE

Married CEOs and stock price crash risk

Jeong‐Bon Kim

1

|Shushu Liao

2

|Yangke Liu

3

1

Department of Accountancy, City

University of Hong Kong, Kowloon,

Hong Kong, China

2

Department of Leadership and

Management, Kühne Logistic University,

Hamburg, Germany

3

Queen's Management School, Queen's

University Belfast, Belfast, UK

Correspondence

Yangke Liu, Queen's Management

School, Queen's University Belfast, 185

Stranmillis Rd., Belfast BT9 5EE, UK.

Email: yangke.liu@qub.ac.uk

Abstract

This study examines whether marriage, as a social con-

struct and cultural norm, can affect firm‐level stock price

crash risk. We find that firms managed by married CEOs

are associated with lower future stock price crash risk,

after controlling for a set of firm characteristics and CEO

traits. We document that CEO marriage reduces crash risk

by curbing bad news hoarding and formation activities.

Moreover, the attenuating impact of CEO marriage on

crash risk is more pronounced among firms with weaker

corporate governance and those run by less prominent,

higher‐delta and lower‐paid CEOs.

KEYWORDS

bad news hoarding, CEO, compensation, corporate governance,

crash risk, marriage

JEL CLASSIFICATION

G12, G30, M52, M12

1|INTRODUCTION

A large body of literature provides evidence that business management is associated with the personal

attributes and experiences of a chief executive officer (CEO), such as overconfidence, trustworthiness,

gender, education, religion and military and financial backgrounds. However, little is known about

the role that marriage plays in business. As a common personal trait and social conduct, a CEO's

marital status may affect managerial activities, aswellasoperationalperformance.Inthisstudy,we

Eur Financ Manag. 2022;28:1376–1412.wileyonlinelibrary.com/journal/eufm1376

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We are grateful to John A. Doukas (the editor) and two anonymous referees for constructive comments and suggestions

that helped us significantly improve our paper. We also appreciate helpful comments from Gareth Campbell, Viet Anh

Dang, John Turner, Mark Humphery‐Jenner, Dimitris Margaritis and Nhut Nguyen Hoang, as well as participants of

the faculty research seminars at Auckland University of Technology, the University of Auckland, Lancaster University

and Queen's University Belfast. All remaining errors are our own. We thank Cláudia Custódio for sharing the data on

CEO general managerial skills index and Peter Demerjian for sharing the data on managerial ability score.

explore whether managers' opportunistic bad news hoarding behaviour and subsequent shareholder

wealth differ systematically between firms headed by married and single CEOs, respectively. Speci-

fically, our analysis focuses on the impact of CEO marital status on firm‐level stock price crash risk.

Stock price crashes indicate extreme negative shocks in the equity market. Prior literature sug-

gests that managerial reporting opportunism, such as deliberately hiding bad news from outsiders, is

a major source of stock price crash risk at the firm level (Hutton et al., 2009;Jin&Myers,2006;J.‐B.

Kim et al., 2011a,2011b). The reluctance to disclose timely bad news stems from a variety of factors,

including the need to maintain stock prices (Graham et al., 2005), concerns over career or job security

(Kothari et al., 2009) and incentives to maintain the esteem of one's peers and firm reputation

(Ball, 2009). If managers accumulate and withhold bad news for an extended period, the share price

will be artificially inflated. When the amount of negative information accumulated over a period

reaches a certain threshold at which the cost of withholding is greater than the associated benefit,

managers are forced to release all the hidden information at once, leading to an unanticipated large‐

scale decline in the stock price or a stock price crash.

Studies have investigated a considerable range of factors that affect firm‐specific future stock price

crash risk. For example, one line of research examines corporate accounting and financial policies,

including financial reporting opacity (Hutton et al., 2009;J.‐B. Kim & Zhang, 2014), tax avoidance

(J.‐B. Kim et al., 2011b), accounting conservatism (J.‐B. Kim & Zhang, 2016), financial statement

comparability or the readability of 10‐Kreports(J.‐B. Kim, Li, et al., 2016;C.Kimetal.,2019)and

debt maturity (V. A. Dang et al., 2018). Another line of research explores whether and how external

corporate governance mechanisms can affect stock price crash risk. Examples of external governance

and monitoring mechanisms include institutional ownership (Callen & Fang, 2013), accounting

standards (DeFond et al., 2015), short selling (Callen & Fang, 2015b;Dengetal.,2020), labour

unionization (J.‐B. Kim et al., 2021), Internal Revenue Service monitoring (Bauer et al., 2021), cor-

porate governance attributes (Andreou et al., 2016), the auditor–client relationship (Callen &

Fang, 2017), engagement auditor office size (Callen et al., 2020), directors' social networks (Fang

et al., 2021), stock liquidity (Chang et al., 2017), the control–ownership wedge (Hong et al., 2017)and

individualistic national culture (T. L. Dang et al., 2019). Moreover, our study is closely related to the

stream of literature on stock price crash risk and executive traits, such as CEO equity incentives as

reflected in the structure of executive compensation contracts (J.‐B. Kim et al., 2011a;Xuetal.,2014),

religion (Callen & Fang, 2015a), age (Andreou et al., 2017) and overconfidence (J.‐B. Kim, Wang,

et al., 2016). However, little is known about whether and how a CEO's marital status, which is a

common individual characteristic related to personal life experience, could have an impact on the

extremedownsideriskofshareholderwealth.Weaimto fill this gap in the literature by investigating

the relation between CEO marital status and stock price crash risk.

We hypothesize that CEO marriage may lead to lower stock price crash risk by reducing

managerial incentives to withhold adverse information and lowering the likelihood of bad news

formation. The business, finance and social science literature suggest that CEO marital status

may affect an individual's ethical and social preferences, which, in turn, impacts executive risk

preferences and corporate financial policies. The normative commitment to marriage involves

espousing the lifestyle of caring for family members and fostering the common good (e.g.,

Booth & Dabbs, 1993; Stack & Eshleman, 1998; Wilcox et al., 2011).

1

Married CEOs might be

more ethical and responsible for investors and other stakeholders in the form of deterring

1

Nicolosi (2013) shows that married CEOs are more likely to significantly increase their dividend payouts than

single ones.

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opportunistic behaviour, such as delaying negative information disclosure, which leads to

lower stock price crash risk. Importantly, married CEOs tend to be more risk‐averse and

undertake less aggressive investment projects compared with single peers (Roussanov &

Savor, 2014), leading to less bad news formation.

Due to the male dominance in executive positions, marriage might indirectly affect a male

CEO's opportunistic behaviour by changing his propensity to maintain dominance and become

egocentric. From a biological point of view, married individuals have lower testosterone levels

than unmarried counterparts (Booth & Dabbs, 1993; Burnham et al., 2003), while lower tes-

tosterone levels promote collaborative decision making (e.g., Wright et al., 2012) and limit the

desire to gain a high and dominant status (e.g., Mehta et al., 2008). Recent research on CEO

facial masculinity suggests that more masculine‐faced CEOs who may be associated with

higher testosterone levels tend to increase financial leverage and engage in acquisitions and

accounting manipulation (Jia et al., 2014; Kamiya et al., 2019). To the extent that married CEOs

with lower testosterone levels have less desire to maintain dominant positions by manipulating

information, firms run by married executives are less prone to crashes. From a psychological

perspective, married CEOs experience more happiness, as they receive more emotional support

from their spouse (Stack & Eshleman, 1998). Better mental health

2

due to mutual support in

marriage leads to less egocentric choices and enables individuals to take into account the

perspectives of other individuals (Todd et al., 2015). Thus, married CEOs, who are less subject

to egocentrism, are more likely to share the feelings of others and less likely to seek personal

interests by misreporting financial status or investing aggressively, which leads to a lower

probability of experiencing stock price crashes (Jin & Myers, 2006).

Further, married CEOs, with greater household responsibilities and family consumption

commitment than single CEOs, are relatively unable to afford potential dismissal due to ethical

issues. They may, therefore, be reluctant to engage in managerial opportunism, such as de-

liberately hiding negative information that leads to heightened litigation risk and reduced

career stability (Cao & Narayanamoorthy, 2011; Kothari et al., 2009; Skinner, 1994,1997).

Married CEOs are more inclined than unmarried CEOs to choose a conservative reporting

policy and voluntarily disclose bad news, which helps to maintain their stable employment

status and avoid extreme negative events, such as litigation. Overall, marriage could effectively

restrict executives' bad news hoarding behaviour. We, therefore, predict that firms run by

married CEOs are less likely to hide bad news and have lower stock price crash risk, compared

to their unmarried counterparts.

To test this conjecture, we examine the relation between CEO marital status and stock

price crash risk. We employ two measures for firm‐specific crash risk: (1) the likelihood of

future negative, extreme firm‐specific weekly returns and (2) the negative conditional

skewness of firm‐specific weekly returns. Our data set for CEO marital status is

drawn from work by Roussanov and Savor (2014). Using a sample of US public

corporations during the period 1993–2008, we find that firms managed by married CEOs

are associated with lower stock price crash risk. This finding is robust after controlling for

a wide range of CEO individual characteristics, such as the CEO's age, gender, tenure,

option holdings and total holdings, which are related to the CEO's risk‐taking behaviour

(Bebchuk, 2009).

2

Bupa Global, an international health insurer, revealed in October 2018 that two‐thirds of business leaders have

suffered from mental health problems, including anxiety, stress and depression.

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