Death is a law: Death of former colleagues and management forecasts

Abstract

We investigate how grief following the death of a CEO's former colleague affects management forecasts. Our results show that the death of a former colleague is associated with a transient, one-year increase in the pessimism of management forecasts. This effect is amplified when the CEO exhibits a greater resemblance or stronger attachment to the deceased. Further, we also find that the effect is less pronounced for CEOs who are more equipped to handle the negative emotions. Additional tests show that CEOs issue pessimistic management forecasts at a higher frequency and exhibit more pessimistic tones in speech during conference calls after the death event. Moreover, we find that CEOs make a staged recovery as their pessimism in issuing management forecasts appears to last only about one year. Further analysis reveals that a firm's stock price crash risk significantly decreases following the death event. Overall, this study extends our knowledge of transient factors by showing that grief can affect the bias contained in management forecasts.