Corporate Governance and Stock Price Crash Risk: Evidence from UK Panel Data
This study examines the relationship between corporate governance characteristics and risk of stock price crash in UK firms. We use CEO Pay Slice (CPS) the fraction of maximum top five executives' total compensation that goes to the CEO, and board 'busyness' the proportion of board level directors who have three or more directorships to evaluate the effect of these two important aspects of corporate governance on stock price crash risk. The CPS reflects relative importance of the CEO as well as the extent to which the CEO is able to extract rents and expropriate shareholders wealth (expropriation effect) Board busyness may create a serious agency problem because directors are "too busy to mind the business" allowing for executives' short termism and bad news hoarding (busyness effect) Using a large sample of UK listed companies over the 1997 to 2010 period, we document evidence supporting a positive relationship between CPS, board busyness and stock price crash risk. In line with the expropriation and busyness effects, we find that companies with high CPS and high levels of board busyness are exposed to higher level of stock price crash risk. The fact that CPS positively impacts on stock price crash risk has a strong implication for the ongoing debate on how to reform executive remuneration so that it provides the right incentives to directors. There is also a direct implication for the public debate on limitation of the number of directorships held by executives from our findings, as we argue that board effectiveness depends on the overall level of board business. JEL classification: G32, G35, G38, J33, L29