Beware of powerful CEOs

Companies with powerful chief executives are at greater risk of experiencing a future stock price crash. That’s according to Powerful CEOs and Stock Price Crash risk, a new paper published in the Journal of Corporate Finance.

Why? Too much power and influence allows CEOs to manipulate and divert company resources for their own purposes. They are more likely to hoard bad news and to engage in tax avoidance and earnings management, with financial statements containing an artificially low proportion of negative to positive words.

Other studies have found powerful CEOs are self-motivating, pressure chief financial officers (CFOs) to engage in earnings manipulation, rig incentive pay and make overconfident decisions, the authors note. Importantly, there is no evidence that powerful CEOs have higher stock price jumps than others. In other words, they don’t represent a high-risk, high-reward bet; there are lots of potential downside and no obvious upside.