Are Managers Punished for Crash Risk ? Evidence from China *

This study examines how stock price crash risk affects subsequent managerial compensation and CEO dismissal rate. We find that managerial compensation significantly decreases and dismissal rate significantly increases following high crash risk, indicating that managers bear the negative consequences of high crash risk. Moreover, we find that the effects of crash risk are more pronounced for state-owned enterprises, after the split-share reform, and for firms located in provinces with higher levels of marketisation. Results from change regressions and an instrumental variable approach suggest that high crash risk causes changes in managerial compensation and dismissal rate, not vice versa. Finally, our evidence suggests that the punishment of managers for high crash risk is efficient in the sense that crash risk significantly decreases after CEO dismissal.