CEO Departure and Stock Price Crashes: The Effects of Crepuscular Behavior

Abstract

This study investigates CEOs’ opportunistic activities in the years prior to their departures. The findings show that the occurrence of a stock price crash is heightened prior to the departure of the CEO. Particularly, one and two years before the CEO departure, firms experience 24.5% and 23.9% more stock price crashes than the rest years of CEO tenure. We ascribe this phenomenon to a “crepuscular behavior”, whereby CEOs in their final years in office appear to act opportunistically by overly hiding negative news from investors. This behavior has certain wealth effects because, for instance, departing CEOs appear to significantly reduce their options and stock ownership, in comparison with their non-departing peers. Finally, this study investigates the corporate governance environment implications surrounding CEO departures.

Keywords: Managerial myopia; Short-termism; Stock price crashes; CEO departure; Corporate governance; Executive compensation

JEL Classification: G30; M12