Top Management Team Fault Lines and Stock Price Crash Risk: Evidence from China

Jingjuan Huang () and Bo Zhu
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Jingjuan Huang: School of Economics and Management, Southwest Jiaotong University, No. 111, North 1st Section, 2nd Ring Road, Chengdu, P. R. China
Bo Zhu: School of Economics and Management, Southwest Jiaotong University, No. 111, North 1st Section, 2nd Ring Road, Chengdu, P. R. China

The International Journal of Accounting (TIJA), 2024, vol. 59, issue 01, 1-53

Abstract: SynopsisThe research problemThis study examined whether and how top management team (TMT) fault lines formed by diversity and division affect stock price crash risk (hereafter, crash risk).MotivationPrior studies have documented how a single characteristic or the demographic diversity of managers affects real economic activities. However, TMT fault lines, formed by the structure of executives’ demographic diversity, remain untapped in crash risk research. Given the potential monopoly of the TMT on information, it is important to determine whether TMT fault lines influence the distribution of bad news. This study therefore explored how TMT fault lines reduce crash risk through the private leakage of bad news by subgroups and the moderating role of analysts in this process.The test hypothesesWe hypothesized that firms with a strong TMT fault line have low stock price crash risk. Moreover, subgroups divided by TMT fault lines have a greater chance of leaking bad news when firms are followed by more analysts, thereby reducing the stock price crash risk to a greater extent.Target populationWe examined 19,228 annual observations of Chinese publicly listed firms from 2008 to 2021.Adopted methodologyWe applied ordinary least squares (OLS) regression and moderation analysis to our study.AnalysesWe evaluated the microgovernance factors affecting crash risk from a novel perspective — internal TMT conflict. First, we performed regression analysis on a sample of Chinese publicly listed firms to determine whether TMT fault lines reduce crash risk and the effect of analysts on this relationship. Second, we performed cross-sectional variation tests for the main regression. Finally, we investigated the effect of a CEO-CFO coalition on crash risk, given that the unequal status of subgroups may reduce the monitoring capacity of any subgroup in a weaker position.FindingsWe found that TMT task-related fault lines are negatively associated with crash risk and positively moderated by analysts. Meanwhile, the TMT biodemographic fault lines do not have a significant influence on crash risk. We also demonstrated that the monitoring effect of TMT task-related fault lines is stronger when external governance is weaker. Finally, additional analysis implies that the monitoring effect of a CEO-CFO coalition fault line remains effective, but this effect is weaker.

Keywords: Top management team fault lines; stock price crash risk; analyst following; bad news leak (search for similar items in EconPapers)
JEL-codes: G14 M42 M54 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S1094406024500045

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