This study investigates the critical intersection between executive tenure dynamics and corporate financial stability, offering a nuanced understanding of how the career horizons of chief executive officers (CEOs) influence the risk of abrupt stock price declines. It also investigates how moderating factors such as CEO pay regulation, CEO shareholding and ownership structure, particularly the distinction between local and central state-owned enterprises (SOEs), influence the impact of career horizons on stock price crash risk (SPCR).
The research employs a comprehensive dataset comprising Chinese A-share listed firms from 2007 to 2022. It utilizes advanced econometric techniques to ensure robust findings, including propensity score matching (PSM) to address selection bias, placebo tests to validate causality and the system generalized method of moments (SysGMM) to account for endogeneity.
The findings reveal that CEOs with shorter career horizons (CCH) are significantly associated with higher SPCR. This counterintuitive outcome is attributed to their risk-averse tendencies, which, while aimed at mitigating uncertainty, inadvertently lead to overly stringent risk control measures. The study further identifies that CEO pay regulation and shareholding both moderate and reduce the impact of career horizons on SPCR. Specifically, the presence of CEO pay regulation and higher CEO shareholding in their respective firms are associated with a diminished SPCR. Moreover, the influence of CCH is more pronounced in non-SOEs compared to SOEs. Within SOEs, the effect is stronger in local SOEs than in central SOEs, reflecting differences in governance mechanisms and regulatory oversight.
This study highlights the risks linked to CCH, offering important guidance for policymakers and corporate boards. Boards should adopt governance tools like deferred compensation, performance-based incentives and equity ownership to curb short-termism and opportunistic behavior. Regulators, meanwhile, should strengthen transparency around CEO succession, compensation and insider trading and enforce policies such as clawbacks and limits on short-term stock option exercises.
This research contributes to the literature by bridging the gap between CEO tenure dynamics and corporate financial stability, offering a fresh perspective on the drivers of SPCR. By examining the moderating roles of CEO pay regulations and shareholding structures, the study provides a holistic view of the interplay between executive decision-making, governance mechanisms and financial risk. The robust methodological framework and firm ownership sub-sample analysis enhance the credibility and generalizability of the findings, making the study a valuable resource for scholars and practitioners in corporate governance and financial management.
