CEO Equity Incentive Duration and Expected Crash Risk

This study examines the effect of chief executive officer (CEO) equity incentive duration on firm-specific ex ante crash risk. Using a measure that explicitly accounts for the length of stock and option grant vesting terms (Gopalan et al. 2014, 2021), we find that longer CEO equity incentive duration reduces investors’ perceived crash risk, gauged by the steepness of option implied volatility smirk. This finding holds for alternative measures of CEO equity incentive duration that account for endogeneity and use an instrumental variable approach. We further find that this negative relation is more salient for firms with younger CEOs or CEOs in the earlier years of their tenure, who have a higher level of career concerns; and for firms with a lower level of total or long-term institutional ownership, of which the external monitoring is weaker. Overall, our results suggest that lengthening CEO equity incentive duration discourages managers from withholding bad news from investors, which reduces a firm’s expected crash risk