The paper entitled “Locality Stereotype, CEO Trustworthiness and Stock Price Crash Risk: Evidence from China”, which was co-written by our school’s Associate Professor Peng Yuchao (the corresponding author), as well as Professor Gu Leilei of the Business School and Associate Professor Liu Jinyu of the University of International Business and Economics, has been officially accepted and is soon going to be published by the Journal of Business Ethics, an internationally authoritative academic journal. The Journal of Business Ethics among the Financial Times 50 Journals and the Business Week 20 Premier Journals is designated by CUFE to be an AA-rated journal.
Exploring how the differences in CEO trustworthiness as a result of the locality stereotype impact the stock price crash risk, the said paper, on the basis of an empirical study of data on Chinese listed companies, finds 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 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. The findings highlight an unexplored imperfection of individual-level trustworthiness as a reliable substitute for formal monitoring devices in terms of improving stock market stability.
The paper makes the following three contributions to relevant research: First, unlike existing papers that focus on the regional trust level of firm’s headquarters, we offer a new insight into perceived trustworthiness at the individual level, i.e. we analyze how a CEO being trusted as an individual distorts the public’s judgment and thus exacerbates the stock price crash risk. Second, by establishing a link between CEO trustworthiness and the risk of a firm’s stock price crash, we diversify the determinants of stock price crash risk. Third, the paper enriches the literature on social trust and reveals the possible adverse consequences of social trust. Blind locality stereotype may inhibit investors’ monitoring of CEOs and thus aggravate the principal-agent problem.
