Skin in the game : does outside directors’ equity-based compensation induce or mitigate stock price crash risk?

This study examines the relationship between outside directors’ equity-based compensation (DEC) and stock price crash risk using a sample of U.S. firms from 2008 to 2021. We find that DEC is associated with lower crash risk, primarily through its role in reducing over-investment, financial misreporting, and bad news hoarding—suggesting that enhanced director monitoring mitigates key crash risk factors. Subsample analyses reveal that the DEC-crash relationship is more pronounced when monitoring demands are higher, such as with greater information asymmetry, agency costs, audit risk, and transient institutional ownership. The impact of DEC also varies with director attributes, including busyness, gender diversity, and quad-qualification. Overall, our findings highlight that equity pay can align outside directors’ interests with shareholders by strengthening risk oversight, offering insights into optimal compensation contracts and governance mechanisms to mitigate crash risk.