CEO personal investment decisions and firm risk

Abstract

We develop a novel method of measuring CEO risk preference based on their personal allocation of deferred compensation funds, and find CEOs holding more volatile deferred compensation portfolios lead riskier firms. We also use the 2008 financial crisis as a natural experiment to check the robustness of this new method and find consistent evidence in support of a positive association between CEO risk‐taking and firm risk. Moreover, the evidence shows that risk‐taking CEOs pursue risky financial and investment policies. Our results, in accord with the behavioural consistency theory, demonstrate that CEOs act consistently across personal and professional choices.

Trust, regulation, and contracting institutions

“…Bryan, Nash, and Patel (2015) find that culture is a significant determinant of compensation contracts. Supporting this view, other studies find that culture is linked to attitudes toward risk, firm risk taking (Cen & Doukas, 2017;Li, Griffin, Yue, & Zhao, 2013;Shao, Kwok, & Zhang, 2013;Ucar, 2019), and investment efficiency (Chen, Jin, Ma, & Xu, 2018). For example, Doukas and Zhang (2016) demonstrate that top managerial executive envy, a psychological trait, increases merger waves motivated by so-called envy-pay.…”

The face of risk: CEO facial masculinity and firm risk

“…Cen and Doukas () find that CEOs with low risk aversion revealed in deferred compensation funds manage riskier firms.…”

CEO investment of deferred compensation plans and firm performance

“…Jackson and Honigsberg () question the incentive‐alignment role of deferred compensation plans by documenting that they are on average heavily invested in firm equity and to a large extent withdrawn by executives after they leave the firm. Cen and Doukas () look at firm risk‐taking and the CEO's personal returns on deferred compensation plans, but rather than focusing on their correlation with the firm stock across different states of the world, the authors examine their unconditional volatility to infer the CEO's risk preferences. We complement this literature by studying how the CEO's exposure to firm risk through deferred compensation changes over time depending on his/her personal portfolio choices.…”