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Locality Stereotype, CEO Trustworthiness and Stock Price Crash Risk: Evidence from China

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Listed:
  • Leilei Gu

    (Central University of Finance and Economics)

  • Jinyu Liu

    (University of International Business and Economics)

  • Yuchao Peng

    (Central University of Finance and Economics)

Abstract

Exploring the locality stereotype with respect to CEO’s trustworthiness, we find that firms whose CEOs are from more reputable hometowns have a higher likelihood of stock price crashes, indicating the presence of a CEO “Trust Exploitation” effect, i.e. a high-trust identity does not guarantee managerial ethics; to the contrary, it could tempt CEOs to abuse outsiders’ trust, camouflage their misconducts and conceal adverse information more severely. The effect of CEO’s perceived trustworthiness on tail risk of stock price remains robust when controlling for the region-level trust of firm’s headquarters, and in 2SLS regression with an instrumental variable. Further, CEO’s “Trust Exploitation” effect is more prominent among firms with lower disclosure quality, higher capital market pressure and higher CEO incentives. Our findings highlight an unexplored imperfection of individual-level trustworthiness as a reliable substitute for formal monitoring devices in terms of improving stock market stability.

Suggested Citation

  • Leilei Gu & Jinyu Liu & Yuchao Peng, 2022. "Locality Stereotype, CEO Trustworthiness and Stock Price Crash Risk: Evidence from China," Journal of Business Ethics, Springer, vol. 175(4), pages 773-797, February.
    • Handle: RePEc:kap:jbuset:v:175:y:2022:i:4:d:10.1007_s10551-020-04631-0
    DOI: 10.1007/s10551-020-04631-0
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    Keywords

    Locality stereotype; CEO trustworthiness; Stock price crash risk;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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