The Effect of CEO Power on the Informativeness of Stock Prices: An Empirical Note

Abstract

Motivated by agency theory, we explore how powerful CEOs influence the extent of stock price informativeness. Using idiosyncratic volatility to measure stock price informativeness, we find that firms with more powerful CEOs experience a more opaque information environment. This is consistent with the notion that more powerful CEOs tend to be more entrenched and are more likely to take actions that do not maximize shareholders’ wealth. To conceal their opportunistic actions, they are less likely to disclose information, resulting in more information asymmetry and therefore lower stock price informativeness. Our additional results based on propensity score matching also confirm the conclusion.

Keywords: CEO power, stock price informativeness, information asymmetry, agency theory, agency conflict

JEL Classification: G32, G34