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Skin in the Game: Does Outside Directors’ Equity-based Compensation Induce or Mitigate Stock Price Crash Risk?
Stock price crashes—sudden and extreme negative movements in share prices—pose serious threats to shareholder value and corporate reputations. While these events often appear unpredictable, a growing body of research links them to weak corporate governance, especially the failure to disclose bad news in a timely manner. Our recent study, Skin in the Game, sheds light […]
Weiqiang Tan is an Associate Professor of Finance at The University of Hong Kong. This post is based on an article forthcoming in the Journal of Accounting and Public Policy by Professor Tan, Professor Yuting Qian, Professor Bo Qin, Professor Daifei Troy Yao, and is part of the Delaware law series; links to other posts in the series are available here.
Stock price crashes—sudden and extreme negative movements in share prices—pose serious threats to shareholder value and corporate reputations. While these events often appear unpredictable, a growing body of research links them to weak corporate governance, especially the failure to disclose bad news in a timely manner. Our recent study, Skin in the Game, sheds light on the role of outside directors in mitigating such crash risk—and how their equity-based compensation (DEC) might provide the right incentives to enhance oversight.
Drawing on a comprehensive dataset of U.S. public firms between 2008 and 2021, we investigate whether awarding equity pay to outside directors strengthens their monitoring role or compromises their independence. The key question is whether this form of compensation induces or mitigates stock price crash risk.
