Board–CEO Trust and Concealing Adverse News
Kee-Hong Bae, Sadok El Ghoul, Zhaoran Gong, Omrane Guedhami, Lixin SuABSTRACT
We investigate how generalized trust, a culturally rooted belief in the trustworthiness of unfamiliar others, influences board oversight. Using an ancestry-based measure of board–CEO trust based on ancestral origins and bilateral trust scores across countries, we find a significant positive relation between board–CEO trust and stock price crash risk, indicating higher bad-news hoarding. This relation remains robust across alternative crash risk measures, sample specifications, and trust measures. Firms with high board–CEO trust exhibit more asymmetric stock market reactions to good news versus bad news and a higher likelihood of material restatements. Analyses of insider trading patterns show that directors in high-trust firms are less informed than CEOs about adverse developments, supporting lax board monitoring rather than collusion between directors and CEOs. Overall, the evidence suggests that culturally inherited trust can weaken board oversight and reduce corporate transparency, consistent with an underexplored governance friction even within well-structured boards.
Data Availability: Data used in this study are available from public sources identified in the study.
JEL Classifications: G14; G34; G41; M12.