Boardroom backscratching and stock price crash risk

Abstract We empirically capture boardroom backscratching, or cronyism, as when a firm's Chief Executive Officer (CEO) and directors concurrently receive excessive remuneration. argue that backscratching can inhibit board's constructive criticism monitoring, resulting in greater likelihood of bad news hoarding. Using 14,104 US firm‐year observations spanning 1999–2020, we document significant positive relationship between stock price crash risk. In additional analyses, show firms produce less readable annual reports engage upward real earnings management channels for concealing news. also find external monitoring mechanisms weaken the association Our main findings withstand several endogeneity tests including propensity score matching, entropy balancing, difference‐in‐differences analysis using firms’ commencement CEO turnover event analysis. study offers insights to securities regulators policymakers revisit notion board independence, develop relevant market oversight revise director executive remuneration disclosure requirements so mitigate adverse performance associated with backscratching.