A Tale of Two 'Skewness': Managerial Epidemic Experience, Probability Weighting, and Stock Price Crash Risk

Abstract

Skewness preference, the tendency to overweight the probability of extreme tail events, can affect managerial decision making. We find that Chinese listed firms managed by CEOs who experienced a largely unpredictable rare event, namely the outbreak of Severe Acute Respiratory Syndrome (SARS) in 2003, during their earlier executive careers have lower stock price crash risk measured by negative skewness. This effect especially matters for CEOs whose experienced events are more salient. Furthermore, professional epidemic experience induces CEOs to deter stock price crashes through altering financial reporting strategies. Overall, entrepreneurs’ skewness preference can reduce the negative skewness of stock returns.