CEO origin and stock price crash risk: Insider versus outsider CEOs

Abstract

AbstractResearch question/issueThe recent market trend in the United States has drawn attention to the fact that new chief executive officers (CEOs) are increasingly being recruited from outside rather than getting promoted from within. This study examines the influence of CEO origin on stock price crash risk.Research findings/insightsUsing a sample of 13,331 firm‐year observations during the 1997–2017 period, we find that CEOs promoted from inside the firm are less likely to trigger stock price crashes than CEOs hired from outside. Further, we show that the negative relation between insider CEOs and stock price crash risk is more pronounced for firms with more conservative accounting policies. Additional analyses document that the difference in stock price crash risk between insider and outsider CEOs is stronger in the early years of their tenure and for CEOs with higher pay‐for‐performance sensitivity and higher turnover risk.Theoretical/academic implicationsOur study contributes to the research on stock price crash risk, especially the recent studies investigating the impact of managerial behavior and traits on stock price skewness. The findings are consistent with the bad news hoarding theory of stock price crashes. Our findings also lend further empirical support to the horizon problem of CEO origin by showing that the relatively short average horizon for outsider CEOs incentivizes them to withhold bad news, leading to higher stock price crash risk.Practitioner/policy implicationsOur study adds to the debate on whether to choose a CEO from inside or outside the firm. The potential higher risk of stock price crashes might help boards of directors rethink their approaches to succession.