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

Leilei Gu (), Jinyu Liu () and Yuchao Peng ()
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Leilei Gu: Central University of Finance and Economics
Jinyu Liu: University of International Business and Economics
Yuchao Peng: Central University of Finance and Economics

Journal of Business Ethics, 2022, vol. 175, issue 4, No 7, 773-797

Abstract: 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.

Keywords: Locality stereotype; CEO trustworthiness; Stock price crash risk (search for similar items in EconPapers)
JEL-codes: G12 G14 G32 Z13 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (13)

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DOI: 10.1007/s10551-020-04631-0

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