CEO Personal Risk-Taking and Corporate Policies

Abstract

This study analyzes the relation between chief executive officer (CEO) personal risktaking, corporate risk-taking, and total firm risk. We find evidence that CEOs who possess private pilot licenses (our proxy for personal risk-taking) are associated with riskier firms. Firms led by pilot CEOs have higher equity return volatility, beyond the amount explained by compensation components that financially reward risk-taking. We trace the source of the elevated firm risk to specific corporate policies, including leverage and acquisition activity. Our results suggest that nonpecuniary risk preferences revealed outside the scope of the firm have implications for project selection and various corporate policies.

CEO Tenure and Risk-Taking

“…For example, financial leverage may indicate managerial risk taking (Cain & Mckeon, 2014). But leverage may also discipline managers from consuming excessive cash flows (Jensen, 1986).…”

“…We also include CEO cash compensation, which may increase risk-taking (Guay, 1999). The firm-level characteristics include (inflation-adjusted) firm size, market-to-book ratio, return on assets (ROA), capital expenditures, R&D expenses, financial leverage, and firm age (Guay, 1999;Coles et al, 2006;Ryan & Wang, 2012;Cain & Mckeon, 2014). We also control for corporate diversification using the (log of) number of business segments.…”

“…This argument may explain the mixed empirical evidence on the relationship between CEO tenure and risk-taking as documented in the literature. Most studies do not detect a significant relation between tenure and risk-taking (Ryan & Wang, 2012;Muscarella & Zhao, 2013;Cain & Mckeon, 2014). Some find a negative relation (Coles et al, 2006;Chakraborty et al, 2007;Hirshleifer et al, 2012).…”

“…A number of studies notably already include CEO tenure in their risk-taking regressions (Bloom & Milkovich, 1998;Coles et al, 2006;Chakraborty et al, 2007;Simsek, 2007;Hirshleifer et al, 2012;Ryan & Wang, 2012;Muscarella & Zhao, 2013;Serfling, 2013;Cain & Mckeon, 2014). We differentiate from these studies in two ways.…”

Management Characteristics and Corporate Risk-taking: An Overall Review

“…Corporate risk taking has previously been examined in terms of performance feedback [2], slack [3,4], top management incentive systems [5][6][7][8], and environmental factors [9]. More recently, scholars begin to shift their attention to the effect of the innate attributes of managers on their risk-taking incentives, such as sensation seeking, overconfidence, education, military background, depression-era life experiences, religious belief, and political affiliations [10][11][12][13][14][15]. In this paper, we classify the CEO characteristics into two basic aspects: the physical and the psychological.…”