Hostname: page-component-78c5997874-g7gxr Total loading time: 0 Render date: 2024-11-15T08:50:17.016Z Has data issue: false hasContentIssue false
  • English
  • Français

CEO Personal Risk-Taking and Corporate Policies

Published online by Cambridge University Press:  09 March 2016

Matthew D. Cain  and
Stephen B. McKeon
Matthew D. Cain
Affiliation:
mdcain@outlook.com, U.S. Securities and Exchange Commission, Washington, DC 20549
Stephen B. McKeon*
Affiliation:
smckeon@uoregon.edu, University of Oregon, Lundquist College of Business, Eugene, OR 97403.
*
*Corresponding author: smckeon@uoregon.edu
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

This study analyzes the relation between chief executive officer (CEO) personal risk-taking, 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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 1 , February 2016 , pp. 139 - 164
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

References

Amihud, Y., and Lev, B.. “Risk Reduction as a Managerial Motive for Conglomerate Mergers.” Bell Journal of Economics, 12 (1981), 605–617.Google Scholar
Barnea, A.; Cronqvist, H.; and Siegel, S.. “Nature or Nurture: What Determines Investor Behavior?” Journal of Financial Economics, 98 (2010), 583–604.Google Scholar
Bauguess, S., and Stegemoller, M.. “Protective Governance Choices and the Value of Acquisition Activity.” Journal of Corporate Finance, 14 (2008), 550–566.CrossRefGoogle Scholar
Benmelech, E., and Frydman, C.. “Military CEOs.” Journal of Financial Economics, 117 (2015), 43–59.Google Scholar
Cesarini, D.; Johannesson, M.; Lichtenstein, P.; Sandewall, Ö.; and Wallace, B.. “Genetic Variation in Financial Decision-Making.” Journal of Finance, 65 (2010), 1725–1754.Google Scholar
Chava, S., and Purnanandam, A.. “CEOs versus CFOs: Incentives and Corporate Policies.” Journal of Financial Economics, 97 (2010), 263–278.CrossRefGoogle Scholar
Chyz, J. “Personally Tax Aggressive Executives and Corporate Tax Sheltering.” Journal of Accounting and Economics, 56 (2013), 311–328.Google Scholar
Coles, J. L.; Daniel, N. D.; and Naveen, L.. “Managerial Incentives and Risk-Taking.” Journal of Financial Economics, 79 (2006), 431–468.CrossRefGoogle Scholar
Core, J., and Guay, W.. “Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility.” Journal of Accounting Research, 40 (2002), 613–630.Google Scholar
Cronqvist, H.; Makhija, A. K.; and Yonker, S. E.. “Behavioral Consistency in Corporate Finance: CEO Personal and Corporate Leverage.” Journal of Financial Economics, 103 (2012), 20–40.Google Scholar
Cronqvist, H., and Siegel, S.. “The Origins of Savings Behavior.” Journal of Political Economy, 123 (2015), 123–169.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Graham, J. R.; Harvey, C. R.; and Puri, M.. “Capital Allocation and Delegation of Decision-Making Authority within Firms.” Journal of Financial Economics, 115 (2015), 449–470.Google Scholar
Graham, J. R.; Harvey, C. R.; and Puri, M.. “Managerial Attitudes and Corporate Actions.” Journal of Financial Economics, 109 (2012), 103–121.CrossRefGoogle Scholar
Grinblatt, M., and Keloharju, M.. “Sensation Seeking, Overconfidence, and Trading Activity.” Journal of Finance, 64 (2009), 549–578.CrossRefGoogle Scholar
Guay, W. R. “The Sensitivity of CEO Wealth to Equity Risk: An Analysis of the Magnitude and Determinants.” Journal of Financial Economics, 53 (1999), 43–71.Google Scholar
Harford, J.; Humphery-Jenner, M. L.; and Powell, R.. “The Sources of Value Destruction in Acquisitions by Entrenched Managers.” Journal of Financial Economics, 106 (2012), 247–261.CrossRefGoogle Scholar
Harford, J., and Li, K.. “Decoupling CEO Wealth and Firm Performance: The Case of Acquiring CEOs.” Journal of Finance, 62 (2007), 917–949.CrossRefGoogle Scholar
Hayes, R. M.; Lemmon, M.; and Qiu, M.. “Stock Options and Managerial Incentives for Risk Taking: Evidence from FAS 123R.” Journal of Financial Economics, 105 (2012), 174–190.CrossRefGoogle Scholar
Hirshleifer, D.; Low, A.; and Teoh, S. H.. “Are Overconfident CEOs Better Innovators?” Journal of Finance, 67 (2012), 1457–1498.Google Scholar
Lin, C.; Ma, Y.; Officer, M.; and Zou, H.. “CEOs’ Military Experience and Acquisition Decisions.” Working Paper, Chinese University of Hong Kong, Lingnan University, and Loyola Marymount University (2011).Google Scholar
Low, A. “Managerial Risk-Taking Behavior and Equity-Based Compensation.” Journal of Financial Economics, 92 (2009), 470–490.Google Scholar
Malmendier, U., and Tate, G. A.. “Who Makes Acquisitions? CEO Overconfidence and the Market’s Reaction.” Journal of Financial Economics, 89 (2008), 20–43.CrossRefGoogle Scholar
Malmendier, U.; Tate, G. A.; and Yan, J.. “Overconfidence and Early-Life Experiences: The Effect of Managerial Traits on Corporate Financial Policies.” Journal of Finance, 66 (2011), 1687–1733.CrossRefGoogle Scholar
McFall, M. C. “Lincoln National Aviation Mortality and Claim Analysis.” North American Actuarial Journal, 33 (1992), 6–8.Google Scholar
Moeller, S. B.; Schlingemann, F. P.; and Stulz, R. M.. “Firm Size and the Gains from Acquisitions.” Journal of Financial Economics, 73 (2004), 201–228.Google Scholar
Pratt, J. W. “Risk Aversion in the Small and in the Large.” Econometrica, 32 (1964), 122–136.CrossRefGoogle Scholar
Prendergast, C. “The Tenuous Trade-Off Between Risk and Incentives.” Journal of Political Economy, 110 (2002), 1071–1102.Google Scholar
Rajan, R. G., and Zingales, L.. “What Do We Know about Capital Structure? Some Evidence from International Data.” Journal of Finance, 50 (1995), 1421–1460.Google Scholar
Rau, P. R., and Vermaelen, T.. “Glamour, Value and the Post-Acquisition Performance of Acquiring Firms.” Journal of Financial Economics, 49 (1998), 223–253.Google Scholar
Roussanov, N., and Savor, P.. “Marriage and Managers’ Attitudes to Risk.” Management Science, 60 (2014), 2496–2508.Google Scholar
Sapienza, P.; Zingales, L., and Maestripieri, D.. “Gender Differences in Financial Risk Aversion and Career Choices Are Affected by Testosterone.” Proceeding of the National Academy of Sciences, 106 (2009), 15268–15273.Google Scholar
Smith, C. W. Jr., and Stulz, R.. “The Determinants of Firms’ Hedging Policies.” Journal of Financial and Quantitative Analysis, 20 (1985), 391–405.Google Scholar
Yermack, D. “Flights of Fancy: Corporate Jets, CEO Perquisites, and Inferior Shareholder Returns.” Journal of Financial Economics, 80 (2006), 211–242.CrossRefGoogle Scholar
Zuckerman, M. “Dimensions of Sensation Seeking.” Journal of Consulting and Clinical Psychology, 36 (1971), 45–52.Google Scholar
Zuckerman, M. Sensation Seeking and Risky Behavior. Washington, DC: American Psychological Association (2007).Google Scholar
Supplementary material: PDF

Cain and McKeon supplementary material

Internet Appendix

Download Cain and McKeon supplementary material(PDF)
PDF 77.7 KB