A Tale of Two “Skewness”: Managerial Epidemic Experience, Probability Weighting and Financial Market Stability

Abstract

Under probability weighting, entrepreneurs with skewness preference tend to seek rightskewed and avoid left-skewed risks. We show that Chinese firms managed by CEOs with professional epidemic experience, i.e., who previously experienced the outbreak of SARS during their tenure as high level executives, have a lower stock price crash risk measured by the negative skewness of stock prices in subsequent periods. In particular, those firms intentionally avoid stock price crashes by adopting more conservative strategies in decisionmaking. Overall, we provide the first evidence on the unintended effect of entrepreneurs’ subjective judgments of the probabilities of disease outbreaks on financial market stability. These have long-term implications for the financial system.