Powerful CEOs and Firm Risk Dynamics During Crises: Insights from Environmental Practices - An International Study

Abstract

The first paper investigates the relationship between CEO power and firm risk at the onset of the global financial crisis 2007 and the COVID-19 pandemic health crisis 2020. An international sample of publicly listed firms in the G7 nations between 2006 and 2021 shows that CEOs with greater power are exposed to higher risk than firms led by CEOs with lesser power. The result is primarily driven by the impact of CEO power on idiosyncratic risk rather than systematic risk. Further, we found that powerful CEOs tend to be more cautious and conservative during crises, as seen in the pandemic, where the positive power–risk relationship is less pronounced. Nevertheless, the power–risk relationship remains unchanged during the more familiar financial crisis. This study has important implications for firms, investors, regulators, and policymakers.

The second paper examines how CEO power affects firm tail risks globally and whether such an effect varies during crisis periods by examining a sample of 12,761 firm-year observations from G7 nations from 2006 to 2021. Based on the difference-in-difference (DiD) model, it is shown that CEOs with greater power and control over the company maintain the exercise of their power similarly during regular and difficult operating periods. Furthermore, the findings are mainly driven by non-financial firms and firms with low R&D expenditure, indicating their risk-taking capacity. Thus, we find that companies with more powerful CEOs are exposed to higher tail risks than those with less powerful CEOs. This holds for both idiosyncratic and systematic tail risk. During crises such as the financial crisis of 2007 and the recent COVID pandemic, the impact of CEO power on tail risk remains relatively unchanged. Our research provides valuable insights for policymakers, investors, regulators, and firms, including CEOs, to better manage risks in the future.

The third paper investigates the influence of CEO power on corporate stock price crash risk in an international setting, alongside the moderating impacts of corporate environmental practices on such a relationship. Two environmental practices are examined: greenhouse gas (GHG) emissions and Sustainable Development Goal 13 (SDG-13 supporting climate action). Analysing data from publicly listed firms in the G7 nations from 2006 to 2021, we discover that firms led by more powerful CEOs are generally exposed to lower crash risks. Additionally, we found that companies implementing more robust environmentally friendly practices, particularly supporting climate actions SDG-13, see a further reduced crash risk. This pattern is especially evident in non-crisis periods, non-financial firms and firms with high environmental and social (ES) scores, i.e., CSR performance. The findings are assured by various robustness tests using alternative estimation models, alternative measures, and additional tests.