A Tale of Two Skewness: Professional Epidemic Experience, Probability Weighting, and Stock Price Crash Risk

Under probability weighting, entrepreneurs’ skewness preference, the tendency to seek right-skewed and avoid left-skewed risks, can affect the negative skewness of stock prices. Based on the evidence after the outbreak of Severe Acute Respiratory Syndrome (SARS), which is caused by the same family of viruses as COVID-19, we show that firms managed by CEOs who previously experienced the outbreak of SARS during their tenure of high executives have lower stock price crash risk measured by negative skewness. Among those firms, this effect especially matters for CEOs that actually experienced prominent operating distress or stock price crashes during the outbreak of SARS. In addition, firms managed by CEOs with professional epidemic experience tend to disclose bad news in a timelier manner, and have lower discretionary accruals. Our overall evidence indicates that entrepreneurs with imprinted professional epidemic experience may overweight the probability of extreme tail events. As a result, they intentionally avoid stock price crashes through preventing the formation and accumulation of bad news.