CEO power and stock price crash risk in India: The moderating effect of insider trades

Kalia, Anki a
A icle
CEO powe and s ock p ice c ash isk in India: The
mode a ing e ec o inside ades
Asian Jou nal o Economics and Banking (AJEB)
P o ided in Coope a ion wi h:
Ho Chi Minh Uni e si y o Banking (HUB), Ho Chi Minh Ci y
Sugges ed Ci a ion: Kalia, Anki a (2024) : CEO powe and s ock p ice c ash isk in India: The
mode a ing e ec o inside ades, Asian Jou nal o Economics and Banking (AJEB), ISSN 2633-7991,
Eme ald, Leeds, Vol. 8, Iss. 2, pp. 169-198,
h ps://doi.o g/10.1108/AJEB-10-2023-0095
This Ve sion is a ailable a :
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CEO powe and s ock p ice c ash
isk in India: he mode a ing e ec
o inside ades
Anki a Kalia
Uni e si y Business School, Panjab Uni e si y, Chandiga h, India
Abs ac
Pu pose –This s udy aims o explo e he ela ionship be ween chie execu i e o ice (CEO) powe and s ock
p ice c ash isk in India. Fu he mo e, i seeks o analyse how inside ades may mode a e he impac o CEO
powe on s ock p ice c ash isk.
Design/me hodology/app oach –A s udy o 236 companies om he S&P BSE 500 Index (2014–2023) ha e
been analysed h ough pooled o dina y leas squa e (OLS) eg ession in he baseline analysis. To enhance he
esul s’ eliabili y, obus ness checks include al e na i e me hodologies, such as panel da a eg ession wi h
ixed-e ec s, bina y logis ic eg ession and Bayesian eg ession. Addi ional con ol a iables and al e na i e
c ash isk measu e ha e also been u ilised. To add ess po en ial endogenei y, ins umen al a iable echniques
such as wo-s age leas squa es (IV-2SLS) and di e ence-in-di e ence (DiD) me hodologies a e u ilised.
Findings –S akeholde heo y is suppo ed by esul s e ealing ha CEO powe p oxies like CEO duali y,
s a us and di ec o ship educe one-yea ahead s ock p ice c ash isk and ice e sa. Inside ades a e ound o
mode a e he link be ween selec dimensions o CEO powe and s ock p ice c ash isk. These indings pe sis
a e add essing po en ial endogenei y conce ns, and he esul s emain consis en ac oss al e na i e
me hodologies and a iable inclusions.
O iginali y/ alue –This s udy signi ican ly ad ances esea ch on s ock p ice c ash isk, especially in
eme ging economies like India. The implica ions o hese indings a e c ucial o in es o s aiming o mi iga e
c ash isk, o co po a ions seeking enhanced go e nance measu es and o policymake s conside ing he
economic and wel a e consequences associa ed wi h his phenomenon.
Keywo ds CEO powe , Co po a e go e nance, S ock p ice c ash isk, Inside ades, India
Pape ype Resea ch pape
1. In oduc ion
Co po a e go e nance mechanisms ha e e ol ed in o a c ucial elemen in ad ancing he
wel a e o di e se s akeholde s. Acco ding o Kuma and Singh (2013), co po a e go e nance
holds a cen al posi ion in guiding o ganisa ions h ough inancial c ises wi h success.
Mo eo e , he p esence o s ong go e nance mechanisms can adep ly add ess con lic s o
in e es wi hin o ganisa ions, he eby bols e ing o e all ope a ional e iciency a he
co po a e le el (Sami e al., 2011). I is wo h no ing ha he isk o s ock p ice c ashes is
in ima ely in e wined wi h hese agency p oblems, as highligh ed by Jin and Mye s (2006).
As such, he comp ehensi e analysis by Wu e al. (2020) ega ding he pi o al ole o
CEO powe
and s ock p ice
c ash isk
in India
169
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h ps://www.eme ald.com/insigh /2615-9821.h m
Recei ed 3 Oc obe 2023
Re ised 25 Oc obe 2023
7 Decembe 2023
Accep ed 19 Decembe 2023
Asian Jou nal o Economics and
Banking
Vol. 8 No. 2, 2024
pp. 169-198
Eme ald Publishing Limi ed
e-ISSN: 2633-7991
p-ISSN: 2615-9821
DOI 10.1108/AJEB-10-2023-0095
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co po a e go e nance in e ec i ely mi iga ing he isk o s ock p ice c ashes holds
signi ican impo ance.
A mul i ude o ac o s can se o luc ua ions in a company’s s ock p ice (Cu le e al.,
1989). Howe e , he p ima y emphasis wi hin he li e a u e on c ash isk cen es on he
agency amewo k (Jin and Mye s, 2006). Wi hin his amewo k, esea che s asse ha
s ock p ice c ash isk p ima ily emana es om he unequal dis ibu ion o in o ma ion
be ween he company’s managemen and ex e nal s akeholde s. This in o ma ion
asymme y is di ec ly co ela ed wi h he deg ee o con ol held by he managemen .
Acco ding o he agency heo y amewo k, he p esence o such in o ma ional dispa i y
p o ides manage s wi h he means o wi hhold ad e se company-speci ic in o ma ion om
in es o s o se e hei pe sonal in e es s (G aham e al., 2005;Ko ha i e al., 2009).
Ne e heless, he s a egy o concealing nega i e news possesses inhe en cons ain s. When
he accumula ed ad e se in o ma ion su passes a ce ain h eshold, sel -in e es ed manage s
a e compelled o disclose he concealed in o ma ion all a once. This sudden e ela ion
igge s a subs an ial decline in he company’s s ock p ices, a phenomenon ex ensi ely
documen ed by Jin and Mye s (2006) and Hu on e al. (2009).
Usually, a company has command o o ice s; despi e ha , only a ew a e p incipally
esponsible o he company’sope a ions(Thompson, 1967). The chie execu i e o ice (CEO)
is o en ega ded as he mos in luen ial o ganisa ional membe (Pea ce, 1981;Hamb ick and
Fuku omi, 1991). Hence, mos esea ch wo ks e ol e a ound he company’sCEO(No bu n,
1989). The li e a u e iden i ies a ious o igins o CEO in luence wi hin an o ganisa ion. The
seminal esea ch by Finkels ein (1992) p oposes ou heads, namely s uc u al, owne ship,
p es igeandexpe ,as signi ican sou ces o CEO powe . The s uc u aldimension ep esen s a
CEO’s hie a chical au ho i y om he company’s o ganisa ional s uc u e (Hamb ick, 1981;
B ass, 1984). This o m o powe is conside ed one o he mos dominan and in luen ial sou ces
(Finkels ein, 1992). CEO duali y (C_DUAL) is one o he cons i uen s o s uc u al powe ha
ep esen s whe e he CEO and he boa d chai pe son a e he same indi iduals (Miz uchi, 1983;
Ha ison e al.,1988;Finkels ein and D’a eni, 1994). CEO compensa ion (C_COMP)and
di ec o ship (C_DIRECTOR) a e o he examples o s uc u al powe (Molz, 1988;Lippe and
Po e , 1997;Bonn and Pe ig ew, 2009).
On he o he hand, owne ship powe e lec s he CEO’s owne ship s ake in he company.
CEOs who a e ounde s o close ela i es o he company’s ounde (C_STATUS) ha e
signi ican in luence h ough hei owne ship powe . This in luence enables hem o shape
he o ganisa ion, exe con ol o e di ec o selec ion and sa egua d hei posi ion wi hin he
company (Boeke , 1989;F ed ickson e al., 1988;P e e , 1981). The hi d dimension, p es ige
powe , a ises om a CEO’s boa d se ice in o he companies o a ainmen o quali ica ions
om p es igious educa ional ins i u ions (Finkels ein, 1992). Finally, expe powe deno es
he CEO’s abili y o na iga e and manage he o ganisa ion’s ex e nal en i onmen
(Hamb ick, 1981). A signi ican sou ce o expe powe is CEO enu e (C_TENURE), as i
implies ha indi iduals who se e as a CEO o longe pe iods accumula e mo e powe . CEOs
wi h longe enu es d aw on hei deep knowledge o he company’s ope a ional landscape,
including indus y dynamics, supply chain in icacies and ma ke condi ions (Fi s enbe g
and Malkiel, 1994;G e e and Mi suhashi, 2007).
The exis ing li e a u e es ablishes a s ong link be ween manage s’abili y o conceal
ad e se, company-speci ic in o ma ion and he ex en o powe hey wield wi hin an
o ganisa ion. Feng e al.(2011)and F iedman (2014) e eal ha in luen ial CEOs p essu e chie
inancial o ice s (CFOs) o manipula e accoun ing p ac ices and p esen pe o mance esul s in
hei a ou . Mo eo e , F acassi and Ta e (2012) ind ha powe ul CEOs ace less sc u iny
om boa ds o di ec o s, as hey o en play a pi o al ole in appoin ing di ec o s and
main aining close ela ionships wi h hem. Manage s also use s a egies such as ea nings
managemen and ax a oidance o conceal nega i e in o ma ion, which signi ican ly inc eases
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he isk o a s ock p ice c ash (Hu on e al., 2009;Kim e al., 2011). Despi e he limi ed esea ch
on he associa ion be ween CEO powe and s ock p ice c ash isk, he insigh s o e ed by hei
esul s a e impe a i e o he cu en s udy. Fo ins ance, Shahab e al. (2020) assessed he
ela ionship be ween CEO powe and s ock p ice c ash isk in hecon ex o Chinese companies
and ound ha highe CEO powe is associa ed wi h an inc eased isk o s ock p ice c ashes.
Simila ly, Al Mamun e al. (2020) also ound a posi i e and signi ican associa ion be ween
powe ul CEOs and s ock p ice c ash isk in he Ame ican con ex . The esea che s also
con empla ed ha he p esence o obus ex e nal mechanisms weakened he examined
ela ionship, bu could no elimina e he e ec o CEO powe on c ash isk. Since he
ela ionship be ween CEO powe and s ock p ice c ash isk is simila ac oss de eloped and
de eloping economies, hus i is expec ed o obse e simila esul s in India.
Ano he pe spec i e on his ma e sugges s ha manage s do no always ind i
ad an ageous o keep bad news hidden. Upholding his no ion some esea ch s udies indica e
ha manage s may ac i ely choose o disclose nega i e in o ma ion soone o educe he isk o
li iga ion (Skinne , 1994;Kasznik and Le , 1995). Addi ionally, He malin and Wesibach (2001)
a gue ha when manage s gain powe h ough hei supe io abili ies, hey ha e li le incen i e o
wi hhold nega i e news. Founde CEOs, in pa icula , o en aim o pu sue s a egies ha
maximise sha eholde alue, esul ing in op imal s ock ma ke pe o mance (Fahlenb ach, 2009).
This endency is pa icula ly p ominen in amily-owned companies, whe e amily membe s ake
on managemen , boa d and in es o oles. In a ious oles and esponsibili ies, amily membe s
wi hin a company o en lack mo i a ion o manipula e s ock p ices by hiding un a ou able
in o ma ion (S inidhi and Liao, 2020). When amily ounde s ake on manage ial oles, hei
pe sonal iden i y becomes deeply in e wined wi h he company’siden i y(Dye and Whe en,
2006). G aham e al. (2017) ha e shown ha powe ul CEOs, who eel secu e in hei posi ions
despi e poo inancial pe o mance, end o p omo e g ea e co po a e anspa ency and ha e
ewe easons o conceal bad news (Ji apo n e al., 2014). Toge he , hese a gumen s om p e ious
esea ch sugges ha companies led by powe ul CEOs may ace a educed isk o s ock p ice
c ashes, as hese CEOs ha e minimal incen i es o wi hhold nega i e company-speci ic news.
Beyond in es iga ing he connec ion be ween CEO powe and s ock p ice c ash isk in
India, his s udy ex ends o explo e how inside ades mode a e his ela ionship. I has been
asce ained ha inside s, p ima ily om he manage ial g oup wi h signi ican owne ship
s akes, end o ade based on ad ance knowledge o i m-speci ic nega i e news, po en ially
disad an aging unin o med ou side in es o s (Ke e al., 2003;Dechow e al., 2016).
Consequen ly, i is an icipa ed ha inside ades in luence bo h CEO powe and s ock
p ice c ash isk.
The p esen s udy is a no el a emp o analyse he nexus be ween CEO powe , inside
ades and s ock p ice c ash isk in India using a da ase comp ising companies lis ed on he
S&P BSE 500 Index in India o he pe iod spanning om 2014 o 2023. As a as au ho ’s
knowledge ex ends, he e is no simila s udy in India ha has del ed in o his speci ic
domain. Fu he mo e, he s a is ics unde sco e he ac ha e ail pa icipa ion in India’s
s ock ma ke s is a an ea ly s age o de elopmen . As o now, only app oxima ely h ee
pe cen o India’s popula ion has en u ed in o he s ock ma ke s, wi h he majo i y o
in es o s con inuing o lean owa ds sa e in es men op ions like bank deposi s (Balwani
e al., 2021). This highligh s he ulne abili y o in es o con idence in he ace o a subs an ial
s ock p ice decline, making i impe a i e o ho oughly in es iga e he esea ch issue a hand.
Mo eo e , while he e a e mul iple ac o s ha may con ibu e o an ele a ed isk o s ock
p ice c ashes, he pa amoun posi ion o he bad news hoa ding heo y in he s udy o c ash
isk and i s associa ion wi h sel -se ing manage ial conduc unde sco e he signi icance o
explo ing he in luence o CEO powe in his con ex .
The in es iga ion employs a ious indica o s o CEO powe , including C_COMP,C_
DUAL,C_STATUS,C_TENURE and C_DIRECTOR o elucida e he impac o CEO powe
CEO powe
and s ock p ice
c ash isk
in India
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on he u u e s ock p ice c ash isk. To empi ically gauge s ock p ice c ash isk, he s udy
employs wo p oxies iz., nega i e condi ional skewness (NCSKEW
þ1
) and down- o-up
ola ili y (DUVOL
þ1
), bo h o which a e measu ed o a u u e ime pe iod þ1. The s udy’s
indings conclude ha g ea e CEO powe is associa ed wi h a educ ion in s ock p ice c ash
isk o e he subsequen yea . These esul s ca y s a is ical signi icance, pa icula ly wi h
espec o C_DUAL,C_STATUS and C_DIRECTOR as he chosen p oxies o CEO powe .
Fu he mo e, hese esul s wi hs and sc u iny when al e na i e me hodologies and s ock
p ice c ash isk measu e a e conside ed. Impo an ly, he indings emain obus e en a e
accoun ing o po en ial endogenei y conce ns. Addi ionally, mode a ion analysis e eals
ha inside ades mode a e he ela ionship be ween selec dimensions o CEO powe (C_
DUAL,C_STATUS and C_DIRECTOR) and s ock p ice c ash isk, p o iding c ucial
insigh s in his a ea.
The es o he pape is o ganised as ollows. Sec ion 2 discusses he e iew o li e a u e
and hypo heses de elopmen . Sec ion 3 ou lines he esea ch me hodology, while sec ion 4
p esen s he esul s and discussions eme ging om he s udy. Las ly, Sec ion 5 concludes
he pape .
2. Re iew o li e a u e and hypo heses de elopmen
2.1 CEO powe and s ock p ice c ash isk
The ounda ion o s ock p ice c ash isk is p ima ily g ounded in he pe spec i e o bad news
hoa ding heo y (Jin and Mye s, 2006). This heo y is based on he in luen ial ole o CEO
powe wi hin op managemen . Acco ding o agency heo is s, he e a e wo key condi ions
ha can exace ba e he isk o a s ock p ice c ash. The i s condi ion in ol es managemen
selec i ely wi hholding un a ou able news, while he second pe ains o he e en ual elease
o his news all a once (Hu on e al., 2009;Ko ha i e al., 2009). The selec i e hoa ding o bad
news by powe ul manage s is o en d i en by mo i es such as he desi e o inc ease pe sonal
weal h (And eou e al., 2016) o conce ns ela ed o hei own ca ee s (Baginski e al., 2018).
When powe ul manage s a e unable o con inue wi hholding bad news beyond a ce ain
h eshold, i esul s in a one- ime elease o his in o ma ion, which, in u n, leads o a
signi ican decline in s ock p ices (Jin and Mye s, 2006).
In con as , p oponen s o s ewa dship heo y challenge he conclusions d awn by agency
heo y. S ewa dship heo y posi s ha manage s can be seen as us wo hy s ewa ds o he
company who ind in insic sa is ac ion in ackling challenging asks (Donaldson, 1990).
Consequen ly, i is less likely ha he p esence o powe ul manage s in co po a e
managemen will lead o an inc eased isk o s ock p ice c ashes. Mo eo e , g ea e CEO
powe has been associa ed wi h imp o ed decision-making speed, which can be bene icial o
o e all o ganisa ional de elopmen (Donaldson and Da is, 1991). The e o e, in unce ain
si ua ions whe e s ock p ices expe ience signi ican luc ua ions, powe ul managemen can
u ilise hei quick decision-making abili ies o espond e ec i ely and mi iga e s ock p ice
c ashes (Tan and Liu, 2016).
Despi e he a ious pe spec i es ound in he li e a u e ega ding he in luence o CEO
powe on a company, he p edominan iew in mains eam esea ch leans owa ds a nega i e
assessmen . Powe ul manage s ha e been consis en ly shown o pu sue objec i es ha do
no align wi h he goal o maximising sha eholde weal h (Daily and Johnson, 1997).
Addi ionally, he p esence o CEOs hailing om he ounding amily ha e also been
associa ed wi h un a ou able co po a e ou comes due o he po en ial lack o en ep eneu ial
alen (Mo ck e al., 1988;Adams e al., 2005). Fu he mo e, se e al issues, including he
exe ion o excessi e in luence on boa d membe s o secu e ex ao dina y manage ial
compensa ion packages, he inc eased likelihood o co po a e aud and engagemen in
accoun ing manipula ion, ha e all been linked o he p esence o powe ul op managemen
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(G abke-Rundell and Gomez-Mejia, 2002;Bebchuk and F ied, 2004;G ins ein and H iba ,
2004;Feng e al., 2011;Mo se e al., 2011;Khanna e al., 2015). As a esul , he exis ence o
oppo unis ic manage ial beha iou has been linked wi h a posi i e impac on he isk o
s ock p ice c ashes (Al Mamun e al., 2020;Shahab e al., 2020).
A CEO can accumula e powe h ough a ious means, including hei co po a e
owne ship s ake, s uc u al posi ion wi hin he o ganisa ion, p es ige, o by showcasing hei
expe ise (Finkels ein, 1992;Daily and Johnson, 1997). As a esul , esea ch s udies ha e
adop ed mul i ace ed amewo ks o explo e he connec ion be ween di e en sou ces o
manage ial powe and hei ela ionship wi h s ock p ice c ash isk. Fi s and o emos , C_
COMP has been ex ensi ely s udied as a dimension o CEO powe , and a signi ican po ion
o esea ch has iden i ied a no able and posi i e in luence o CEO pay on s ock p ice c ash
isk (Xu e al., 2014;Cui e al., 2019;Shahab e al., 2020). In a simila ein, And eou e al. (2016)
ha e also ound a signi ican posi i e impac o CEO compensa ion on s ock p ice c ash isk,
pa icula ly o younge CEOs. Thei esea ch indica es ha young CEOs engage in
signi ican bad news hoa ding o enhance hei immedia e inancial incen i es wi h he
expec a ion ha hei cu en poo pe o mance will be o se by s ong u u e pe o mance.
On he o he hand, a s udy by Kim e al. (2011) ook a unique app oach by examining he
ole o inancial incen i es o he CFO ins ead o he CEO. The s udy concluded ha equi y
incen i es encou age manage s, including CFOs, o engage in bad news hoa ding, ul ima ely
leading o a s ock p ice c ash. No ably, he ole o inancial incen i es ecei ed by CFOs
appea s o be mo e in luen ial in such si ua ions compa ed o hose ecei ed by CEOs. Las ly,
Xu and Zou (2019) p esen ed an inconsis en inding as hei esea ch could no disce n a
signi ican associa ion be ween he CEO’s sha e o pay and s ock p ice c ash isk. In
summa y, he ollowing hypo hesis has been o mula ed based on hese di e se esea ch
indings.
H1. CEO compensa ion is posi i ely ela ed o u u e s ock p ice c ash isk.
Fu he mo e, ano he signi ican dimension o CEO powe , C_DUAL has gained ac ion in
he li e a u e. S inidhi and Liao (2020) ound subs an ial e idence o sugges ha C_DUAL
enhances manage ial incen i es, which in u n may lead o he a i icial in la ion o
pe o mance and an inc eased isk o a s ock p ice c ash among companies lis ed in he
Uni ed S a es. Simila ly, Le e al. (2022) made simila obse a ions, as hey iden i ied a
signi ican posi i e impac o CEO duali y on s ock p ice c ash isk. Addi ionally, T an e al.
(2023) p oposed ha he isk o a s ock p ice c ash inc eases signi ican ly among Vie namese
amily-owned companies wi h C_DUAL compa ed o o he amily companies wi hou i . This
sugges s ha in such cases, i becomes exceedingly challenging o he boa d o di ec o s o
emo e powe ul CEOs om he company, e en when hey may be ine icien .
Howe e , i is wo h no ing ha con as ing pe spec i es ha e also eme ged in he
li e a u e. Hunj a e al. (2020) eached a di e en conclusion, sugges ing ha C_DUAL may
ha e mo e a ou able e ec s han ad e se consequences, as i could signi y be e knowledge
and expe ise on he pa o he CEO. Conside ing he ex an li e a u e, he ollowing
hypo hesis has been o mula ed.
H2. CEO duali y is posi i ely ela ed o u u e s ock p ice c ash isk.
CEOs can be classi ied in o wo b oad ca ego ies iz., ounde s o hei ela i es ( e e ed o as
amily CEOs), and hose ec ui ed ex e nally (conside ed as agen CEOs). Family CEOs ypically
ha e long-s anding ela ionships wi h boa d membe s and o he key s akeholde s, which o en
ansla es in o g ea e powe (Finkels ein, 1992). Addi ionally, amily CEOs and agen CEOs
ha e di e en ou look and beha iou s. Family CEOs end o engage in iskie en u es because
hey a e less conce ned abou being i ed (Dal on and Daily, 2001). Agen CEOs, on he
o he hand, may no ace po en ial capi al losses, bu hey o en wo y abou job secu i y
CEO powe
and s ock p ice
c ash isk
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(Fahlenb ach, 2009). Based on hese a gumen s, one migh easonably expec agen CEOs o
mo e likely engage in bad news hoa ding o p o ec hei ca ee s. This sugges s ha
C_STATUS may lowe s ock p ice c ash isk. Suppo ing his iew, Yang e al. (2023a,b) ound
ha amily CEOs s eng hen he nega i e ela ionship be ween co po a e social esponsibili y
(CSR) and s ock p ice c ash isk, since amily i ms expe ience lowe Type I agency p oblems,
which limi s amily manage s om pu suing sel -in e es ed goals. Simila ly, T an e al. (2023)
sugges s ha highe co po a e owne ship among CEOs makes hem mo e isk-a e se and leads
hem o engage in ac i i ies ha educe sha eholde isk, he eby a oiding bad news hoa ding.
Howe e , Long e al. (2020) and Al Mamun e al. (2020) ound con lic ing esul s, sugges ing ha
e en powe ul manage s, including amily CEOs, can engage in bad news hoa ding. Based on
he majo i y o he li e a u e, he ollowing hypo hesis has been o mula ed.
H3. CEO s a us is nega i ely ela ed o u u e s ock p ice c ash isk.
C_TENURE ca ies signi ican implica ions o o ganisa ional pe o mance (Hamb ick and
Fuku omi, 1991). The economic ou comes associa ed wi h C_TENURE can a y, esul ing in
ei he posi i e (Wu e al., 2005) o nega i e (Mille , 1991) consequences o a i m. Howe e ,
when ocussing on he con ex o s ock p ice c ash isk, he p esen s udy aligns wi h
empi ical e idence ha p ima ily suppo s he posi i e impac o C_TENURE (Cui e al.,
2019;Al Mamun e al., 2020). CEOs s wi h longe enu es may become excessi ely en enched
in hei pe spec i es o he i m, ende ing hem less adap able o changes in he ex e nal
en i onmen (Le in hal and Ma ch, 1993). The e o e, based on he a o emen ioned
explana ion ollowing hypo hesis has been o mula ed.
H4. CEO enu e is posi i ely ela ed o u u e s ock p ice c ash isk.
No ably, no all a ibu es o CEO powe ha e ecei ed conside able a en ion in he c ash
isk li e a u e, and one such a ibu e is C_DIRECTOR, which has been la gely o e looked.
F om he agency pe spec i e, i is a gued ha o mi iga e agency p oblems, he oles o he
CEO and he chai man o he boa d should be sepa a e (Fama and Jensen, 1983). Voo decke s
e al. (2007) ha e asse ed ha he CEO’s p esence on he boa d se es as a sou ce o CEO
powe and may po en ially weaken he boa d’s con ol. Thus, acco dingly he ollowing
hypo hesis has been o mula ed.
H5. CEO di ec o ship is posi i ely ela ed o u u e s ock p ice c ash isk.
2.2 Mode a ing e ec o inside ades on CEO powe and s ock p ice c ash isk
The consequences o inside ades a e no only linked wi h CEO powe bu also wi h he s ock
p ice c ash isk (Ja e, 1974;Ellio e al., 1984;Fe nandes and Fe ei a, 2009;Ko ha i e al.,
2009). Se e al esea ch s udies ha e illus a ed ha powe ul inside s usually indica ed by
CEOs o CFOs end o incu inside sales p io o inancial di icul ies. Fo ins ance, highe
inside sales ha e been wi nessed p io o e en s such as iling o bank up cy pe i ion,
di idend announcemen s linked wi h lowe g ow h oppo uni ies, public decla a ion o
ma e ial in e nal con ol weaknesses o accoun ing i egula i ies (John and Lang, 1991;
Seyhun and B adley, 1997;Beneish, 1999;Johnson e al., 2009;The eno , 2012;Skai e e al.,
2013;Ag awal and Coope , 2015). Al hough he li e a u e acknowledges he p esence o
s udies examining he impac o CEO powe and inside ades on s ock p ice c ash isk (e.g.
Shahab e al., 2020;He e al., 2021), howe e he mode a ing e ec o inside ades on he
ela ionship be ween CEO powe and s ock p ice c ash isk emains unexplo ed. Acco dingly,
d i en by he ou comes o ela ed li e a u e he ollowing hypo hesis is p oposed.
H6. Inside ades mode a e he associa ion be ween CEO powe and u u e s ock p ice
c ash isk.
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3. Resea ch me hodology
3.1 Sample selec ion and da a sou ces
The s udy is based on a sample o companies lis ed on he S&P BSE 500 Index, co e ing a
en-yea pe iod om Ap il 1, 2013, o Ma ch 31, 2023. The sample was me iculously e ined
h ough a se ies o da a il e ing condi ions, esul ing in a inal coun o 236 companies,
ep esen ing 2,360 i m-yea obse a ions. Fi s and o emos , all banking and inancial
se ices companies we e excluded om he sample due o hei unique egula o y
o e sigh unde laws including he RBI Ac , 1934 and he Banking Regula ion Ac , 1949.
Secondly, public sec o unde akings we e also omi ed om he sample, gi en hei
dis inc social obliga ions. Thi dly, companies wi h iscal yea -ends o he han Ma ch 31
we e excluded om he inal da ase . Fou hly, companies ha we e no consis en ly pa
o he Index h oughou he s udy pe iod we e also elimina ed. Las ly, companies
unde going co po a e es uc u ing du ing he s udy pe iod we e likewise emo ed om
conside a ion.
Da a o he a iables unde in es iga ion in his s udy has been collec ed om di e se
sou ces. Speci ically, p oxies o CEO powe ha e been ob ained om he annual epo s o
he espec i e companies. In con as , da a ela ed o s ock p ice c ash isk and a ious
con ol a iables ha e been sou ced om he P owessIQ da abase, which is me iculously
main ained by he Cen e o Moni o ing Indian Economy (CMIE). Speci ically, he da a
ela ing o he addi ional con ol a iable in he obus ness sec ion, namely analys co e age
has been p ocu ed om he websi e o T endlyne (h ps:// endlyne.com/). Las ly, he da a
conce ning he mode a ing a iable inside ades has been inco po a ed om he o icial
websi e o BSE (h ps://bseindia.com/).
3.2 Va iable measu emen
3.2.1 S ock p ice c ash isk. Building on he g oundwo k laid by p io esea ch (Kim e al.,
2011;Xu e al., 2014;Al Mamun e al., 2020;Shahab e al., 2020), his s udy employed wo
p oxies, iz., NCSKEW
þ1
and DUVOL
þ1
o gauge s ock p ice c ash isk. These a iables
a e measu ed in he ime pe iod þ1, e lec ing u u e s ock p ice c ash isk. To commence,
he s udy adop s he app oach p oposed by Fama and MacBe h (1973) o calcula ing i m-
speci ic weekly e u ns (W
i,
). This calcula ion me hod in ol es es ima ing W
i,
as he na u al
loga i hm o one plus he esidual e u ns de i ed om he ma ke model ou lined in
Equa ion (1).
i; ¼
α
iþβ1;i m; −2þβ2;i m; −1þβ3;i m; þβ4;i m; þ1þβ5;i m; þ2þ
ε
i; (1)
whe e
i,
signi ies he e u n o s ock ion ading day , and
m,
deno es he e u n on he S&P
BSE 500 index on he same ading day .NCSKEW
þ1
is de i ed by compu ing he nega i e
o he hi d momen o abno mal weekly e u ns di ided by he s anda d de ia ion o
abno mal weekly e u ns aised o he hi d powe (Chen e al., 2001). A g ea e alue o
NCSKEW
þ1
signi ies a heigh ened le el o s ock p ice c ash isk. Equa ion (2) p o ides he
ma hema ical o mula o i s calcula ion:
NCSKEWi; þ1¼−nðn1Þ
3
=2P ¼1Wi; ;Wi; 3
ðn1Þðn2ÞP ¼1ðWi; ;Wi; 2
3
=
2
(2)
whe e, W
i,
5 i m-speci ic weekly e u n in he iscal yea , n5numbe o obse a ions in
he yea .
DUVOL
þ1
is he na u al loga i hm o he a io o he s anda d de ia ion o he “down”
weeks and he “up”weeks (Chen e al., 2001). “Down”weeks a e when he e u ns a e lowe
han he annual mean, while “up”weeks a e hose when he e u ns a e mo e han he annual
CEO powe
and s ock p ice
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mean. A highe alue o DUVOL
þ1
indica es a g ea e isk o a s ock p ice c ash. The
o mula o calcula ing DUVOL
þ1
is highligh ed h ough Equa ion (3).
DUVOLi; þ1¼lognðnu–1ÞƩdown w2
i; .ðnd1ÞƩup w2
i; o(3)
whe e, n
u
5numbe o “up”weeks in a yea , n
d
5numbe o “down”weeks in a yea ,
W
i,
5 i m-speci ic weekly e u ns in he iscal yea .
3.2.2 Measu es o CEO powe . CEO powe is a mul i-dimensional concep , as
acknowledged in p e ious esea ch (Finkels ein, 1992). Building upon his unde s anding,
Peni (2014) no es ha CEOs occupy a pi o al posi ion as he mos in luen ial execu i es
wi hin a company. Consequen ly, his s udy de ines he di e se a ibu es o manage ial
powe associa ed wi h a CEO. D awing upon he a ious sou ces o CEO powe iden i ied by
Finkels ein (1992), his s udy employs i e dis inc measu es.
Fi s ly, he s udy employs C_COMP, ep esen ing an aspec o s uc u al powe . I
encompasses he mone a y alue o o al compensa ion, including sala y, pe quisi es,
commission, bonuses and simila componen s, paid o a CEO in he cu en inancial yea
(Pa hasa a hy e al., 2006). Ano he aspec o s uc u al powe , C_DUAL, is also examined.
C_DUAL a ises when a single indi idual simul aneously holds he posi ions o chai man o
he boa d and CEO wi hin a company (He man, 1981;Fi s enbe g and Malkiel, 1994). This
bina y a iable akes he alue o one when he chai man o he boa d and he CEO oles a e
held by he same pe son and ze o o he wise.
Addi ionally, C_STATUS ep esen s ano he c ucial aspec o s uc u al powe
in e wined wi h owne ship s akes (Daily and Johnson, 1997). This a iable is also a
bina y measu e, ha akes he alue o one i he CEO is he ounde o he company o a
ela i e o he ounde and ze o o he wise (Jaya aman e al., 2000;Adams and Fe ei a, 2009).
C_TENURE se es as ano he p oxy o CEO powe , alling wi hin he dimension
ep esen ing he CEO’s expe ise. I quan i ies he CEO’s leng h o se ice in yea s wi hin he
company (Simsek, 2007;Lewellyn and Mulle -Kahle, 2012).
Finally, C_DIRECTOR cons i u es ano he dimension o CEO powe wi hin he s uc u al
ca ego y. I is an indica o a iable ha akes he alue o one i he cu en CEO also holds a
posi ion on he boa d o he company and ze o o he wise (Tien e al., 2013;Ting and Huang,
2018). As ecognised by Finkels ein (1992), he s uc u al sou ce o CEO powe is conside ed
one o he mos p edominan and in luen ial sou ces o powe . The e o e, his s udy places
subs an ial emphasis on his dimension o de ine CEO powe .
3.2.3 Inside ades. In compliance wi h India’s s ock ma ke egula o ’s SEBI (P ohibi ion
o Inside T ading) Regula ions, 2015, inside s, classi ied as connec ed pe sons o hose in
possession o unpublished p ice-sensi i e in o ma ion, a e manda ed o disclose sha e
ansac ions exceeding Rs. 10 lakhs wi hin wo ading days each qua e . These disclosu es
a e submi ed o bo h he espec i e companies and he s ock exchanges whe e he s ocks a e
lis ed. In o ma ion on his a iable is sou ced om he o icial BSE websi e (h ps://bseindia.
com/). The a iable is dicho omously measu ed, aking he alue o one o inside ades
wi hin a inancial yea and ze o o he wise, aligning wi h he app oach used by Hasnan
e al. (2022).
3.2.4 Con ol a iables. To ensu e a comp ehensi e unde s anding o he impac o CEO
powe on u u e s ock p ice c ash isk and o accoun o indi idual company cha ac e is ics,
his analysis inco po a es se e al con ol a iables. This app oach aligns wi h es ablished
esea ch p ac ices (Kim e al., 2011;Xu e al., 2014;Yeung and Len o, 2018;Al Mamun e al.,
2020;Shahab e al., 2020;S inidhi and Liao, 2020).
Fi s ly, he con ol a iable SIZE e lec s he size o he company and is measu ed by
aking he na u al loga i hm o he ma ke alue o he i m’s equi y, consis en wi h p io
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coe icien s depic ed h ough panel da a ixed-e ec s eg ession models was highe han he
baseline model. Addi ionally, o he CEO powe sou ces, C_COMP {NCSKEW
þ1
(β52.37,
p>0.05, DUVOL
þ1
(β53.17, p>0.05)} and C_TENURE {NCSKEW
þ1
(β50.09, p>0.05,
DUVOL
þ1
(β50.03 and p>0.05)}, also p esen ed esul s in line wi h baseline sec ion. Thus,
he obse a ion ha highe CEO powe leads o lowe u u e s ock p ice c ash isk in India is
main ained.
4.3.1.2 Bayesian eg ession. Beyond employing adi ional equen is me hodological
app oaches, his s udy ex ends i s analysis by inco po a ing Bayesian me hods oo ed in Bayes’
heo em o p obabili y (Bayes, 1763). In his app oach, ap io ibelie s abou he associa ion
be ween CEO powe and s ock p ice c ash isk a e o mula ed. These belie s a e hen combined
wi h assump ions abou he likelihood o obse ing he gi en da a, o ming a pos e io
dis ibu ion. The obse ed da a se e o upda e and e ine he ini ial belie s, p o iding a nuanced
pe spec i e on he ela ionship be ween he a iables unde in es iga ion.
Con as ingly, classical null hypo hesis signi icance es ing has aced c i icism o i s
disp opo iona e emphasis on s a is ical signi icance o mee publica ion s anda ds
(T a imow and Ea p, 2017). As an al e na i e, Bayesian analysis has gained p ominence
in he social sciences (e.g. Hansen e al., 2004;Block and Wagne , 2014;Ce que i and Ven u a,
2015;Kwon e al., 2016;Segnon e al., 2018;Jiang and Liu, 2020), o e ing a mo e nuanced
pe spec i e.
Howe e , Bayesian analysis in oduces challenges, pa icula ly in he selec ion o p io
dis ibu ions. Recognising he subjec i i y associa ed wi h in o ma i e p io s, his s udy
aligns wi h he app oach ad oca ed by Jiang and Liu (2020), op ing o he mo e cau ious
choice o non-in o ma i e p io dis ibu ions. Addi ionally, o explo e he pos e io
dis ibu ion o pa ame e s, he s udy employs Ma ko Chain Mon e Ca lo (MCMC)
simula ion (Gelman and Rubin, 1992), d awing a o al o 11,000 samples and disca ding
he ini ial 1,000 o ensu e con e gence and eliabili y in he analysis.
Table 5 epo s he eg ession esul s om he Bayesian analysis. The indings we e
simila in e ms o di ec ional impac o a ious dimensions o CEO powe on u u e s ock
Va iable
NCSKEW
þ1
DUVOL
þ1
Pos e io mean 95% C.I. Pos e io mean 95% C.I.
C_COMP 5.17 [8.47, 1.88] 1.09 [1.23, 3.89]
C_DUAL 0.06 [0.13, 0.01] 0.00 [0.02, 0.01]
C_STATUS 0.06 [0.13, 0.01] 0.00 [0.01, 0.01]
C_TENURE 0.00 [0.00, 0.00] 0.00 [0.00, 0.00]
C_DIRECTOR 0.27 [0.39, 0.14] 0.02 [0.04, 0.00]
DTURNOVER 0.00 [0.00, 5.21] 2.63 [3.34, 8.59]
RET 16.90 [12.12, 21.68] 2.77 [1.86, 3.69]
M/B 0.00 [0.01, 0.00] 0.00 [0.00, 0.00]
SIZE 0.04 [0.02, 0.06] 0.01 [0.00, 0.01]
LEV 0.88 [0.66, 1.09] 0.01 [0.05, 0.03]
Cons an 1.49 [1.99, 0.99] 0.21 [0.31, 0.12]
N 2,360 2,360 2,360 2,360
No e(s): C_COMP 5CEO compensa ion; C_DUAL 5CEO duali y; C_STATUS 5CEO s a us; C_
TENURE 5CEO enu e; C_DIRECTOR 5CEO di ec o ship; NCSKEW
þ1
5nega i e condi ional skewness
measu ed a þ1;DUVOL
þ1
5down- o-up- ola ili y measu ed a þ1; DTURNOVER 5de- ended u no e ;
RET 5company-speci ic weekly e u ns; M/B 5ma ke o book alue o equi y; SIZE 5size o company
measu ed by aking he na u al log o ma ke capi alisa ion; LEV 5le e age. Bayesian eg ession
me hodology based on he Ma ko Chain Mon e Ca lo (MCMC) simula ion has been applied o ob ain he said
es esul s. To al numbe o d aws 11,000 (o which 1,000 disca ded)
Sou ce(s): Au ho ’s calcula ions based on using S a a 14
Table 5.
Robus ness esul s-
al e na i e
me hodology
(Bayesian eg ession)
CEO powe
and s ock p ice
c ash isk
in India
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p ice c ash isk. To illus a e, majo i y o he CEO powe dimensions, iz., C_COMP,C_
DUAL,C_STATUS and C_DIRECTOR we e ound o nega i ely impac s ock p ice c ash
isk measu ed by NCSKEW
þ1
and DUVOL
þ1.
Only C_TENURE was ound o exhibi a
posi i e impac on he c ash isk measu es. The esul s conce ning he con ol a iables also
emained in line wi h he baseline equen is esul s.
4.3.2 Al e na i e measu e o s ock p ice c ash isk. The obus ness o he es esul s has
been u he assessed by inco po a ing an al e na i e measu e o s ock p ice c ash isk. In
consis ence wi h p e ious esea ch s udies (e.g. Kim e al., 2011;Cui e al., 2019;Xu and Zou,
2019;Al Mamun e al., 2020;S inidhi and Liao, 2020) a bina y CRASH a iable has been
employed as an al e na i e measu e o s ock p ice c ash isk o assess he ela ionship
be ween CEO powe and u u e s ock p ice c ash isk.
The CRASH indica o a iable akes he alue o one i a i m has encoun e ed one o mo e
c ash weeks du ing a iscal yea and ze o o he wise. C ash weeks a e iden i ied as hose
weeks in which a i m’s i m-speci ic weekly e u ns (W
i,
) all 3.2 s anda d de ia ions below
he mean i m-speci ic weekly e u ns o e he en i e iscal yea . This al e na i e measu e
allows o a bina y assessmen o whe he a i m expe ienced a s ock p ice c ash du ing he
yea , p o iding an addi ional pe spec i e on he ela ionship be ween CEO powe and s ock
p ice c ash isk.
The bina y logis ic eg ession model gauges he e ec o CEO powe on u u e s ock p ice
c ash isk. Table 6 p esen s he esul s ela ing o he CRASH bina y a iable. The esul s
upheld ha he e is a signi ican nega i e impac o C_DUAL (β50.15, p<0.01),C_
STATUS (β50.33, p<0.01) and C_DIRECTOR (β50.36, p<0.10) on u u e s ock p ice
c ash isk. Fu he mo e, he associa ion o C_COMP and C_TENURE emained
insigni ican ly nega i e and posi i e espec i ely wi h espec o c ash isk.
4.3.3 Addi ional con ol a iables. This sec ion del es in o an examina ion o he baseline
eg ession esul s, sc u inising hei sensi i i y subsequen o he inclusion o wo
Va iable CRASH
þ1
C_COMP 2.08 (2.34)
C_DUAL 0.15*** (2.09)
C_STATUS 0.33*** (4.09)
C_TENURE 0.07 (10.7)
C_DIRECTOR 0.36* (2.18)
DTURNOVER 0.01*** (8.30)
RET 92.22*** (3.49)
M/B 0.46*** (5.40)
SIZE 0.02*** (5.93)
LEV 0.29*** (2.76)
Cons an 0.21* (0.16)
N 2,360
R
2
0.68
Yea e ec s Yes
Indus y e ec s Yes
No e(s): C_COMP 5CEO compensa ion; C_DUAL 5CEO duali y; C_STATUS 5CEO s a us; C_
TENURE 5CEO enu e; C_DIRECTOR 5CEO di ec o ship; CRASH
þ1
5bina y a iable c ash measu ed a
þ1; DTURNOVER 5de- ended u no e ; RET 5company-speci ic weekly e u ns; M/B 5ma ke o book
alue o equi y; SIZE 5size o company measu ed by aking he na u al log o ma ke capi alisa ion;
LEV 5le e age. ***, ** * indica es he le el o signi icance a 1%, 5% and 10% espec i ely. -s a is ics
epo ed in he pa en heses a e based on obus s anda d e o s. Bina y logis ic eg ession me hodology has
been applied o ob ain he said es esul s
Sou ce(s): Au ho ’s calcula ions based on using S a a 14
Table 6.
Robus ness esul s-
al e na i e s ock p ice
c ash isk measu e
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supplemen a y con ol a iables, namely, inancial cons ain s (FC) and analys co e age
(AC). FC, encapsula es he inancial p edicamen o a i m hinde ing i om inancing i s
in ended in es men s (Lamon e al., 2001). Consequen ly, such i ms a e an icipa ed o eso
o ex e nal sou ces o ul illing hei unding needs. In he pu sui o ex e nal inancing,
inancially cons ained i ms end o wi hhold mo e bad news, he eby encoun e ing an
escala ed isk o u u e s ock p ice c ashes (He and Ren, 2023). The measu emen o FC
commonly elies on cash low sensi i i y, p oxied by he a io o a i m’s ne cash low om
ope a ing ac i i ies o o al asse s (S ini asan and Thampy, 2017).
On he o he hand, nume ous esea ch s udies ha e iden i ied a co ela ion be ween he
in luence o analys co e age (AC) and he isk o s ock p ice c ashes (e.g. Xu e al., 2013;He
e al., 2019;Kim e al., 2019;Yang e al., 2023a,b). The ounda ion o li e a u e on s ock p ice
c ash isk e ol es a ound he concep o manage ial beha iou cha ac e ised by he hoa ding
o nega i e news, d i en by ac o s such as in o ma ional opaci y and agency con lic s (Jin and
Mye s, 2006;Hu on e al., 2009). In his con ex , inancial analys s o b oke ages play a c ucial
ole as in o ma ion in e media ies. I is posi ed ha hey can mi iga e he endency o
manage s o hoa d bad news, consequen ly educing he isk o a s ock p ice c ash. Analys s,
wi h hei sophis ica ed abili y o acqui e and p ocess i m-speci ic in o ma ion, a e well-
posi ioned o imely iden i y and communica e nega i e de elopmen s h ough b oke age
epo s o media co e age. This p oac i e communica ion is belie ed o con ibu e o a
diminished s ock p ice c ash isk. AC is ope a ionalised as a dummy a iable, aking he alue
o one i a i m is co e ed by any inancial analys and ze o o he wise.
The pooled OLS eg ession esul s, de ailed in Table 7, align closely wi h he baseline
indings. The ou comes consis en ly a i med he signi ican ly nega i e associa ion o h ee
Va iable NCSKEW
þ1
DUVOL
þ1
C_COMP 3.73** (1.66) 5.48* (3.25)
C_DUAL 0.06* (0.03) 0.04* (0.00)
C_STATUS 0.06* (0.04) 0.02* (0.01)
C_TENURE 0.00 (0.01) 0.00 (0.01)
C_DIRECTOR 0.22*** (0.06) 0.03** (0.02)
DTURNOVER 0.00* (0.00) 0.00 (0.00)
RET 18.59*** (2.47) 3.01*** (0.48)
M/B 0.08*** (0.00) 0.00* (0.09)
SIZE 0.05*** (0.01) 0.01*** (0.00)
LEV 0.72*** (0.11) 0.02* (0.00)
FC 1.38*** (0.17) 0.06* (0.03)
AC 0.08** (0.03) 0.02*** (0.01)
Cons an 1.63*** (0.25) 0.19*** (0.05)
N 2,360 2,360
R
2
0.63 0.76
Yea e ec s Yes Yes
Indus y e ec s Yes Yes
No e(s): C_COMP 5CEO compensa ion; C_DUAL 5CEO duali y; C_STATUS 5CEO s a us; C_
TENURE 5CEO enu e; C_DIRECTOR 5CEO di ec o ship; NCSKEW
þ1
5nega i e condi ional skewness
measu ed a þ1;DUVOL
þ1
5down- o-up- ola ili y measu ed a þ1; DTURNOVER 5de- ended u no e ;
RET 5company-speci ic weekly e u ns; M/B 5ma ke o book alue o equi y; SIZE 5size o company
measu ed by aking he na u al log o ma ke capi alisa ion; LEV 5le e age; FC 5 inancial cons ain s;
AC 5analys co e age. ***, ** * indica es he le el o signi icance a 1, 5 and 10%, espec i ely. -s a is ics
epo ed in he pa en heses a e based on obus s anda d e o s. Pooled OLS eg ession me hodology has been
applied o ob ain he said es esul s
Sou ce(s): Au ho ’s calcula ions based on using S a a 14
Table 7.
Robus ness esul s-
addi ional con ol
a iables
CEO powe
and s ock p ice
c ash isk
in India
185
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CEO powe me ics—namely, C_DUAL,C_STATUS and C_DIRECTOR and s ock p ice
c ash isk p oxied by NCSKEW
þ1
and DUVOL
þ1
. Addi ionally, i was obse ed ha C_
COMP exe ed a signi ican and nega i e in luence on u u e s ock p ice c ash isk. No ably,
he impac o C_TENURE on c ash isk emained s a is ically insigni ican and posi i e.
Tu ning a en ion o he newly inco po a ed con ol a iables, he analysis e ealed ha
inancially cons ained i ms exhibi ed an ele a ed isk o s ock p ice c ashes. Fu he mo e,
companies wi h s ocks co e ed by analys s demons a ed a mi iga ed s ock p ice c ash isk.
This b oade se o a iables no only o i ied he obus ness o he indings bu also
p o ided esh insigh s in o he nuanced dimensions o c ash isk.
4.3.4 Add essing endogenei y conce ns. To accoun o po en ial endogenei y in he
ela ionship be ween CEO powe and u u e s ock p ice c ash isk, his s udy employs he
ins umen al a iables wi h he wo-s age leas squa es (IV-2SLS) and di e ence-in-
di e ence (DiD) me hodologies. Fo he IV-2SLS echnique, his s udy in line wi h p e ious
esea ch s udies (Xu e al., 2014;Yeung and Len o, 2018) employs indus y a e ages o he
a ious p oxies o CEO powe as he ins umen al a iables. The ins umen al a iables a e
selec ed based on he belie ha hey a e co ela ed wi h he subsequen CEO powe p oxy o
he ele an company, sa is ying he selec ion c i e ia o ins umen s. Simul aneously, hese
indus y a e ages a e expec ed no o be associa ed wi h he ele an company’s u u e s ock
p ice c ash isk, sa is ying he exclusion c i e ia o he ins umen s. Equa ion (6) ou lines he
eg ession model conduc ed o he i s s age o he IV-2SLS eg ession, which is designed o
es ima e he ela ionship be ween he ins umen al a iables and CEO powe :
CEOPowe i; ¼
α
þβ1AVG CEOPowe i; þβ2Con olsi; þ
ε
i; (6)
whe e AVG_CEOPowe
i,
includes he indi idual indus y a e ages o C_COMP, C_DUAL,
C_STATUS, C_TENURE and C_DIRECTOR. The con ol a iables a e simila o hose in
Model 4. The p edic ed alues ob ained om Model 6 eplace he ins umen al a iable AVG_
CEOPowe
i,
in he second s age o IV-2SLS eg ession model speci ied h ough
ollowing model:
C ash Riski; þ1¼
α
þβ1PREDICT CEOPowe i; þβ2Con ols þ
ε
i; (7)
The C ash_Risk
i, þ1
includes bo h NCSKEW
þ1
and DUVOL
þ1
measu es. PREDICT_
CEOPowe
i,
ep esen s he p edic ed alues o a ious CEO powe p oxies (PREDICT_
COMP, PREDICT_DUAL, PREDICT_STATUS, PREDICT_TENURE and PREDICT_
DIRECTOR) om Model 6. The lis o con ol a iables emains he same as in o me
eg ession models. Table 8 p esen s he esul s o eg ession Models 6 and 7. The signi ican
nega i e associa ion be ween selec p oxies o CEO powe (C_DUAL, C_STATUS and C_
DIRECTOR) and u u e s ock p ice c ash isk was main ained e en a e add essing he
endogenei y conce ns. Simila ly, he eg ession esul s o C_COMP and C_TENURE also
emained he same.
Al hough his esea ch sugges s a signi ican nega i e e ec o CEO powe on one-yea
ahead s ock p ice c ash, howe e he po en ial endogenous ela ion be ween he said
a iables can be a cause o conce n. Endogenei y may a ise om unobse able he e ogenei y,
as he e could be hidden i m-speci ic ac o s ha simul aneously impac bo h CEO powe
p oxies and c ash isk. Thus, d awing cues om Al Mamun e al. (2020) and ollows DiD
me hodology o alle ia e endogenei y conce ns. The adop ion o DiD app oach ackles
omi ed a iable bias ha can be linked wi h CEO powe and s ock p ice c ash isk. Fu he ,
his echnique helps in es ablishing causali y ha is no ambiguous since i is conduc ed
a ound exogenous shock o he co e a iable, i.e. CEO powe . This sec ion in es iga es he
ole o CEO u no e as an exogeneous e en in assessing he changes in s ock p ice c ash
isk. CEO u no e is conside ed o be ela ed o CEO powe , since powe ul CEOs ace lowe
AJEB
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Fi s s age Second s age
Va iable C_COMP C_DUAL C_STATUS C_TENURE C_DIRECTOR Va iable NCSKEW
þ1
DUVOL
þ1
AVG_COMP 10.11*** (11.2) ––––PREDICT_COMP 3.12 (2.01) 1.98 (4.56)
ACG_DUAL –6.88*** (18.06) –––PREDICT_DUAL 0.15* (2.35) 0.23** (3.12)
AVG_STATUS ––14.34*** (25.04) ––PREDICT_
STATUS
0.55* (2.33) 0.40 (7.61)
AVG_TENURE –––8.77*** (14.11) –PREDICT_
TENURE
0.09 (0.65) 0.08 (6.43)
AVG_
DIRECTOR
––––8.21*** (24.76) PREDICT_
DIRECTOR
0.78*** (1.29) 0.65*** (5.61)
DTURNOVER 2.12*** (1.17) 0.05 (2.75) 0.14 (2.13) 0.28 (2.59) 0.27 (0.71) DTURNOVER 0.03 (9.92) 2.37*** (1.07)
RET 4.58*** (3.93) 16.77*** (3.32) 12.36*** (1.75) 28.15** (2.07) 4.84*** (1.56) RET 65.31*** (11.28) 10.96* (3.48)
M/B 146*** (1.37) 0.85 (13.05) 0.13* (7.16) 0.59 (3.19) 0.24*** (6.54) MB 0.03*** (3.28) 6.40 (1.12)
SIZE 2.68*** (12.09) 0.39 (4.15) 0.22*** (16.38) 0.67*** (9.41) 0.39** (5.44) SIZE 0.32** (4.55) 0.50*** (1.84)
LEV 8.97*** (6.69) 0.78*** (1.91) 0.99*** (12.19) 1.43 (10.7) 0.30 (3.06) LEV 0.42*** (5.12) 0.16* (2.55)
Cons an 6.54*** (4.77) 9.79*** (8.86) 7.09*** (15.31) 45.98*** (6.15) 5.66*** (18.73) Cons an 4.58*** (4.61) 0.01** (7.89)
N 2,360 2,360 2,360 2,360 2,360 N 2,360 2,360
R
2
0.19 0.17 0.31 0.19 0.24 R
2
0.87 0.77
Yea e ec s Yes Yes Yes Yes Yes Yea e ec s Yes Yes
Indus y e ec s Yes Yes Yes Yes Yes Indus y e ec s Yes Yes
No e(s): C_COMP 5CEO compensa ion; C_DUAL 5CEO duali y; C_STATUS 5CEO s a us; C_TENURE 5CEO enu e; C_DIRECTOR 5CEO di ec o ship; AVG_
C_COMP 5a e age measu e o CEO compensa ion o companies in he same indus y; AVG_C_DUAL 5a e age measu e o CEO duali y o companies in he same
indus y; AVG_C_STATUS 5a e age measu e o CEO s a us o companies in he same indus y; AVG_C_TENURE 5a e age measu e o CEO enu e o companies
in he same indus y; AVG_C_DIRECTOR 5a e age measu e o CEO di ec o ship o companies in he same indus y; PREDICTED_C_COMP 5p edic ed alue o
CEO compensa ion as es ima ed in he i s s age o IV-2SLS; PREDICTED_C_DUAL 5p edic ed alue o CEO duali y as es ima ed in he i s s age o IV-2SLS;
PREDICTED_C_STATUS 5p edic ed alue o CEO s a us as es ima ed in he i s s age o IV-2SLS; PREDICTED_C_TENURE 5p edic ed alue o CEO enu e as
es ima ed in he i s s age o IV-2SLS; PREDICTED_C_DIRECTOR 5p edic ed alue o CEO di ec o ship as es ima ed in he i s s age o IV-2SLS;
NCSKEW
þ1
5nega i e condi ional skewness measu ed a þ1;DUVOL
þ1
5down- o-up- ola ili y measu ed a þ1; DTURNOVER 5de- ended u no e ;
RET 5company-speci ic weekly e u ns; M/B 5ma ke o book alue o equi y; SIZE 5size o company measu ed by aking he na u al log o ma ke capi alisa ion;
LEV 5le e age; AVG_C_COMP,AVG_C_DUAL,AVG_C_STATUS,AVG_C_TENURE, and AVG_C_DIRECTOR, a e used as ins umen al a iables in he i s s age
o IV-2SLS model. ***, ** * indica es he le el o signi icance a 1, 5 and 10%, espec i ely. -s a is ics epo ed in he pa en heses a e based on obus s anda d e o s
Sou ce(s): Au ho ’s calcula ions based on using S a a 14
Table 8.
Add essing
endogenei y-IV-2SLS
eg ession esul s
CEO powe
and s ock p ice
c ash isk
in India
187
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u no e isk is-
a- is less powe ul CEOs (Finkels ein e al., 2009), al e na i ely, i is unlikely
ha CEO u no e di ec ly a ec s s ock p ice c ash isk, he e o e, e e se causali y is no a
conce n he e.
Fo he applica ion o DiD echnique, his s udy ca ego ises sample i ms in o ea men
and con ol g oups. The companies ca ego ised unde ea men g oup a e he ones whe e
CEO u no e akes place du ing he s udy pe iod, while con ol g oups a e simila
companies based on i m size o ea men g oups whe e no CEO u no e akes place. The
changes in CEO powe and s ock p ice c ash isk ha e been e alua ed o bo h he ea men
(companies wi h CEO u no e ) and con ol (ma ched companies) g oups. Panel A o Table 9
Be o e A e DiD
Panel A: uni a ia e analysis
Di e ence in mean NCSKEW
þ1
be ween ea men and
con ol companies
0.23** (0.09) 0.16* (0.01) 2.36*** (0.43)
Di e ence in mean DUVOL
þ1
be ween ea men and
con ol companies
0.12** (0.00) 0.04** (0.00) 1.42* (0.06)
Di e ence in mean C_COMP be ween ea men and
con ol companies
0.43 (1.23) 0.36* (0.04) 1.05 (0.00)
Di e ence in mean C_DUAL be ween ea men and
con ol companies
0.21* (0.63) 0.03* (0.02) 3.48** (0.01)
Di e ence in mean C_STATUS be ween ea men and
con ol companies
0.18*** (0.07) 0.06** (0.00) 1.13* (0.00)
Di e ence in mean C_TENURE be ween ea men and
con ol companies
0.35* (0.00) 0.27** (0.13) 2.49* (0.00)
Di e ence in mean C_DIRECTORSHIP be ween
ea men and con ol companies
0.22** (0.06) 0.11* (0.18) 1.77* (0.00)
Va iable NCSKEW
þ1
DUVOL
þ1
Panel B: eg ession analysis
TREAT 0.01 (1.09) 0.00 (0.00)
POST 0.46*** (0.02) 0.08*** (0.01)
TREAT*POST 0.46*** (0.03) 0.08*** (0.01)
DTURNOVER 0.00 (0.00) 0.00 (0.00)
RET 78.50*** (2.45) 0.93*** (0.36)
M/B 0.00 (0.00) 0.00 (0.00)
SIZE 0.05*** (0.00) 0.01*** (0.01)
LEV 0.29*** (0.05) 0.02** (0.01)
Cons an 0.56*** (0.13) 0.08*** (0.02)
N 205 205
R
2
0.73 0.65
Yea e ec s Yes Yes
Indus y e ec s Yes Yes
No e(s): TREAT 5bina y a iable ha akes he alue o 1 i he company is ca ego ised unde he ea men
g oup i.e. he company expe ienced CEO u no e and 0 i he company is ca ego ised unde he con ol g oup i.e.
he company did no expe ience any CEO u no e ; POST 55bina y a iable ha akes he alue o 1 pos he
CEO u no e pe iod and 0 o he wise; TREAT*POST 5an in e ac ion a iable be ween he ea men g oup
and pos CEO u no e pe iod; NCSKEW
þ1
5nega i e condi ional skewness measu ed a þ1;
DUVOL
þ1
5down- o-up- ola ili y measu ed a þ1; DTURNOVER 5de- ended u no e ;
RET 5company-speci ic weekly e u ns;M/B5ma ke o book alue o equi y; SIZE 5size o company
measu ed by aking he na u al log o ma ke capi alisa ion;LEV5le e age. *** and ** indica es he le el o
signi icance a 1 and 5% espec i ely. -s a is ics epo ed in he pa en heses a e based on obus s anda d e o s.
Di e ence-in-Di e ence panel da a eg ession me hodology has been applied o ob ain he said es esul s
Sou ce(s): Au ho ’s calcula ions based on using S a a 14
Table 9.
Add essing
endogenei y-
di e ence-in-di e ence
analysis
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p esen s he es esul s om he uni a ia e analysis. The esul s indica e ha he di e ences
in he mean alues o all he p oxies o CEO powe be ween ea men and con ol companies
p io o CEO u no e we e s a is ically signi ican . Fu he , a e CEO u no e , he mean
alues o CEO powe p oxies o ea men companies signi ican ly lowe ed compa ed o
con ol companies. The uni a ia e analysis also e ealed ha he s ock p ice c ash isk
inc eased mo e ea men companies is-
a- is con ol g oup, indica ing ha CEO u no e
lowe s CEO powe which u he inc eases he isk o s ock p ice c ash.
A e examining he uni a ia e esul s, he ollowing mul i a ia e DiD eg ession model
was un:
C ash Riski; þ1¼
α
þβ1POSTi; þβ2TREATi; þβ3POST*TREATi; þβ4Con ols þ
ε
i;
(8)
whe e C ash_Risk
i, þ1
is al e na i ely ep esen ed by NCSKEW
þ1
and DUVOL
þ1
measu ed
one yea ahead. POST
i,
e e s o he bina y a iable ha akes he alue o one pos he CEO
u no e pe iod, and ze o o he wise, TREAT
i,
akes he alue o one i a company has
expe ienced CEO u no e and ze o o he wise, POST*TREAT
i,
is an in e ac ion e m, and
Con ols include SIZE, LEV, RET, DTURNOVER, M/B, IND and YEAR.
Panel B o Table 9 asce ains a signi ican ly posi i e impac o POST*TREAT
i,
on c ash
isk indica ing ha ea men companies expe ience a highe s ock p ice c ash isk ollowing
he e en o CEO u no e , highligh ing ha CEO powe weakens in companies pos such an
e en . The e o e, hese esul s u he a i m ha CEO powe lowe s he incidence o u u e
s ock p ice c ash isk.
4.4 Assessing mode a ing e ec s o inside ades
The mode a ing e ec o inside ades on he associa ion be ween CEO powe and u u e
s ock p ice c ash isk has been analysed wi h he applica ion o pooled OLS hie a chical
eg ession me hodology. The eg ession models o he same has been speci ied as below:
C ash Riski; þ1¼
α
þβ1CEOPowe i; þβ2Inside T adesi; þβ4Con olsi; þ
ε
i; (9)
C ash Riski; þ1¼
α
þβ1CEOPowe i; þβ2Inside T adesi;
þβ3CEOPowe i; * Inside T adesi; þβ4Con olsi; þ
ε
i; (10)
whe e C ash_Risk
i, þ1
ep esen s he a iable u u e s ock p ice c ash isk (NCSKEW
þ1
and
DUVOL
þ1
) measu ed one yea ahead. CEOPowe
i,
, indica es he a ious p oxies o powe
dimensions o a CEO (C_COMP, C_DUAL, C_STATUS, C_TENURE and C_DIRECTOR).
Inside T ades
i,
is he mode a ing a iable when he in e ac i e a iable “CEOPowe
i,
*
Inside T ades
i,
”is signi ican (Ba on and Kenny, 1986). The lis o con ols emains he same
as speci ied in Model 4 and Table 1 en ails he de ailed de ini ions o all he a iables.
The mode a ing a iable s eng hens he ela ionship be ween wo a iables (Ba on and
Kenny, 1986). Da a analysis in he hie a chical eg ession model ollows ce ain s eps. Fi s ly,
he mode a ing a iable, iz., inside ades is en e ed in he eg ession Model 9. Secondly, he
in e ac i e a iable o i e dimensions o CEO powe and inside ades a e included in he
Model 10.
The es esul s o his sec ion ha e been epo ed in Table 10. The indings indica e ha
he mode a ing a iable inside ades poses a signi ican ly posi i e impac on di e se
measu es o c ash isk {NCSKEW
þ1
(β50.06, p<0.10, DUVOL
þ1
(β50.07, p<0.01)}.
Fu he , he es esul s con i med he mode a ion e ec s o inside ades on he associa ion
o selec dimensions o CEO powe iz., C_DUAL, C_STATUS and C_DIRECTOR and s ock
p ice c ash isk. Thus, H6 is no ully suppo ed.
CEO powe
and s ock p ice
c ash isk
in India
189
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5. Conclusion
This s udy explo es he impac o CEO powe on u u e s ock p ice c ash isk wi hin he
con ex o companies lis ed on he S&P BSE 500 Index in India du ing he pe iod om 2013 o
2022. The indings e eal ha , excep o CEO enu e, all o he measu es o CEO powe
examined show a nega i e associa ion wi h one-yea ahead o u u e s ock p ice c ash isk.
Pa icula ly, CEO duali y, s a us and di ec o ship exhibi signi ican nega i e e ec s on
s ock p ice c ash isk, while CEO compensa ion does no demons a e simila signi icance.
These esul s main ain hei obus ness when applying al e na i e me hodological
app oaches including a ixed-e ec s panel da a eg ession model and Bayesian eg ession
based on MCMC simula ion. Fu he , he esul s hold e en a e inco po a ing an al e na e
measu e o s ock p ice c ash isk and some addi ional con ol a iables such as inancial
cons ain s and analys co e age. Fu he mo e, he s udy add esses conce ns o endogenei y
Column A Column B
Va iable NCSKEW
þ1
NCSKEW
þ1
DUVOL
þ1
DUVOL
þ1
C_COMP 4.81** (1.82) 1.34 (1.90) 1.16** (3.87) 3.26 (3.84)
C_DUAL 0.03* (0.05) 0.09** (0.00) 0.01* (0.01) 0.05* (0.00)
C_STATUS 0.02** (0.06) 0.05* (0.04) 0.07* (0.01) 0.01* (0.01)
C_TENURE 0.04 (0.00) 0.00 (0.00) 0.00 (0.01) 0.00 (0.00)
C_DIRECTOR 0.06* (0.10) 0.24*** (0.00) 0.04* (0.02) 0.17* (0.00)
INSIDER_TRADES 0.06* (0.03) 0.10* (0.09) 0.07*** (0.00) 0.09* (0.02)
C_COMP* INSIDER_TRADES –8.28 (1.33) –1.45 (3.89)
C_DUAL* INSIDER_TRADES –0.13* (0.12) –0.01* (0.00)
C_STATUS* INSIDER_TRADES –0.06* (0.01) –0.11* (0.00)
C_TENURE* INSIDER_TRADES –0.00* (0.08) –0.00 (0.02)
C_DIRECTOR* INSIDER_
TRADES
–0.06* (0.02) –0.03** (0.00)
DTURNOVER 0.00* (0.00) 0.00 (0.00) 2.04 (0.00) 6.19 (0.00)
RET 42.04*** (2.39) 16.75* (14.03) 4.38*** (0.51) 4.26* (4.63)
M/B 0.00** (0.00) 0.00 (0.00) 0.00* (0.00) 0.00 (0.00)
SIZE 0.11*** (0.02) 0.04 (0.02) 0.09*** (0.00) 0.03 (0.01)
LEV 0.17* (0.15) 0.86* (0.21) 0.12* (0.04) 0.05 (0.03)
Cons an 3.19*** (0.47) 1.55 (0.34) 0.91*** (0.10) 0.86 (0.15)
N 2,360 2,360 2,360 2,360
R
2
0.43 0.67 0.31 0.46
Yea e ec s Yes Yes Yes Yes
Indus y e ec s Yes Yes Yes Yes
No e(s): C_COMP 5CEO compensa ion; C_DUAL 5CEO duali y; C_STATUS 5CEO s a us;
C_TENURE 5CEO enu e; C_DIRECTOR 5CEO di ec o ship; INSIDER_TRADES 5inside ading;
C_COMP*INSIDER_TRADES 5in e ac ion a iable be ween CEO compensa ion and inside ading;
C_DUAL*INSIDER_TRADES 5in e ac ion a iable be ween CEO duali y and inside
ading; C_STATUS*INSIDER_TRADES 5in e ac ion a iable be ween CEO s a us and inside ading;
C_TENURE*INSIDER_TRADES 5in e ac ion a iable be ween CEO enu e and inside ading;
C_DIRECTOR*INSIDER_TRADES 5in e ac ion a iable be ween CEO di ec o ship and inside ading;
NCSKEW
þ1
5nega i e condi ional skewness measu ed a þ1;DUVOL
þ1
5down- o-up- ola ili y
measu ed a þ1; DTURNOVER 5de- ended u no e ; RET 5company-speci ic weekly e u ns;M/
B5ma ke o book alue o equi y; SIZE 5size o company measu ed by aking he na u al log o ma ke
capi alisa ion; LEV 5le e age. *** and ** indica es he le el o signi icance a 1 and 5%, espec i ely.
-s a is ics epo ed in he pa en heses a e based on obus s anda d e o s. Pooled OLS hie a chical eg ession
me hodology has been applied o ob ain he said es esul s. Column A ela es o he es ing o Model 9 whe e
only he mode a ing a iable is en e ed, while Column B ep esen s he esul s pe aining o Model 10 whe e
bo h he mode a ing and in e ac ion a iables a e en e ed
Sou ce(s): Au ho ’s calcula ions based on using S a a 14
Table 10.
Assessing mode a ing
e ec s o inside ades
on associa ion be ween
CEO powe and s ock
p ice c ash isk
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by ini ially employing he IV-2SLS es ima ion, using he a e age CEO powe measu es o
o he i ms wi hin he same indus y as ins umen s. Secondly, DiD echnique also add essed
he endogenei y conce ns by ca ego ising he sample companies in o ea men and con ol
g oups based on exogenous shock o CEO u no e . The s udy also examined he mode a ing
e ec s o inside ades on he associa ion be ween CEO powe and s ock p ice c ash isk. The
esul s ound ha he p esence o inside ades inc eases he isk o a u u e c ash isk and i
also mode a es he ela ionship be ween selec dimensions o CEO powe iz., duali y, s a us
and di ec o ship and s ock p ice c ash isk.
These indings hold signi ican implica ions o eme ging economies like India, whe e
s ock p ice c ashes can pose a p o ound impac on he in es men communi y. Fi s ly, despi e
he g owing pe inence o unde s anding he nuances o s ock p ice c ash isk, limi ed heed
has been paid o his a ea wi hin he Indian s ock ma ke . The e a e s udies ha ha e
examined he e ec o ou side block owne ship (Chauhan e al., 2015), s ock liquidi y
(Chauhan e al., 2017) and co po a e go e nance including co po a e social esponsibili y
(Hunj a e al., 2020) on s ock p ice c ash isk in India. Howe e , he heme explo ed in his
s udy emains unique.
Secondly, his s udy’s esul s which p onounced he signi ican nega i e impac o CEO
powe gauged h ough CEO duali y, s a us and di ec o ship on he po en ial isk o u u e
s ock p ice c ash isk signi y a no able depa u e om he con en ional eliance on agency
heo y. Ins ead, his esea ch p ominen ly highligh s he applica ion o s akeholde heo y
wi hin he unique landscape o India’s co po a e en i onmen . Thi dly, he indings bea
subs an ial implica ions o e ail in es o s, who, in con as o ins i u ional in es o s
possess cons ained esou ces o coun e losses on accoun o s ock p ice c ashes.
Th ough a comp ehensi e examina ion, his s udy un eils how speci ic indica o s o CEO
powe can help mi iga e he isk o s ock p ice c ashes, se ing as a i al oadmap o e ail
in es o s seeking o educe hei exposu e o isk in he e e -changing landscape o capi al
ma ke s.
Fou hly, in 2020, he Secu i ies and Exchange Boa d o India (SEBI) imposed a
manda o y equi emen o he op 500 lis ed companies based on ma ke capi alisa ion o
sepa a e he oles o chai pe son and CEO. Howe e , his manda e was subsequen ly e ised
o become olun a ily. In con as o his egula o y shi , he esul s o his s udy o e
empi ical e idence suppo ing a signi ican nega i e e ec o CEO duali y on s ock p ice
c ash isk. This unde sco ed he impo ance o egula o s econside ing hei s ance on CEO
duali y and i s implica ions o co po a e go e nance. Fi hly, he e ela ion ha inc eased
CEO powe is associa ed wi h a educed isk o u u e s ock p ice c ashes unde sco es he
signi icance o amily business s uc u es wi hin he Indian co po a e landscape.
Consequen ly, u u e esea ch endea ou s can del e deepe in o his dimension by
s a i ying he s udy sample in o amily and non- amily companies, he eby p o iding
addi ional aluable insigh s. Six hly, he s udy’s indings, which link he p esence o inside
ades wi h he associa ion be ween CEO powe and u u e s ock p ice c ash isk, unde sco e
he de imen al e ec s o such p ac ices. Despi e SEBI manda ing he disclosu e o inside
ades, se e al illegal ansac ions e ade de ec ion by go e nmen and co po a e au ho i ies,
posing h ea s o s ock p ice declines. Add essing his issue u he could be bene icial.
Finally, he s udy was dis inc i e in i s app oach by inco po a ing Bayesian eg ession
analysis, a non- equen is me hodology, alongside adi ional classical me hods. This no el
inclusion o Bayesian echniques in managemen esea ch ep esen s a ela i ely unexplo ed
a enue, adding dep h and di e si y o he analy ical amewo k employed. In conclusion, he
indings om his s udy o e essen ial insigh s o companies and e ail in es o s seeking o
manage and mi iga e conce ns ela ed o s ock p ice c ash isk. These indings also hold
signi ican ele ance o policymake s, o e ing aluable inpu o u u e policy
ecommenda ions and conside a ions.
CEO powe
and s ock p ice
c ash isk
in India
191
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