Skewness preference, the tendency to overweight the probability of extreme tail events, can affect managerial decision making. We find that Chinese listed firms managed by CEOs who experienced a largely unpredictable rare event, namely the outbreak of Severe Acute Respiratory Syndrome (SARS) in 2003, during their earlier executive careers have lower stock price crash risk measured by negative skewness. This effect especially matters for CEOs whose experienced events are more salient. Furthermore, professional epidemic experience induces CEOs to deter stock price crashes through altering financial reporting strategies. Overall, entrepreneurs’ skewness preference can reduce the negative skewness of stock returns.

This paper assesses the impact of the severe acute respiratory syndrome (SARS) on the stock market of China. Our results indicate that the Chinese stock market reacts rapidly to the SARS epidemic. We provide strong empirical evidence that the epidemic has an immediate impact on the pharmaceutical and tourism industries. In particular, pharmaceutical companies are benefited from the outbreak of SARS, while the tourism sector is adversely affected. Our results imply the existence of a profitable trading rule during an epidemic.