Skip to main content Accessibility help
×
Home

CEO Personal Risk-Taking and Corporate Policies

  • Matthew D. Cain (a1) and Stephen B. McKeon (a2)

Abstract

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.

    • Send article to Kindle

      To send this article to your Kindle, first ensure no-reply@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about sending to your Kindle. Find out more about sending to your Kindle.

      Note you can select to send to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be sent to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

      Find out more about the Kindle Personal Document Service.

      CEO Personal Risk-Taking and Corporate Policies
      Available formats
      ×

      Send article to Dropbox

      To send this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Dropbox.

      CEO Personal Risk-Taking and Corporate Policies
      Available formats
      ×

      Send article to Google Drive

      To send this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Google Drive.

      CEO Personal Risk-Taking and Corporate Policies
      Available formats
      ×

Copyright

Corresponding author

*Corresponding author: smckeon@uoregon.edu

References

Hide All
Amihud, Y., and Lev, B.. “Risk Reduction as a Managerial Motive for Conglomerate Mergers.” Bell Journal of Economics, 12 (1981), 605617.
Barnea, A.; Cronqvist, H.; and Siegel, S.. “Nature or Nurture: What Determines Investor Behavior?” Journal of Financial Economics, 98 (2010), 583604.
Bauguess, S., and Stegemoller, M.. “Protective Governance Choices and the Value of Acquisition Activity.” Journal of Corporate Finance, 14 (2008), 550566.
Benmelech, E., and Frydman, C.. “Military CEOs.” Journal of Financial Economics, 117 (2015), 4359.
Cesarini, D.; Johannesson, M.; Lichtenstein, P.; Sandewall, Ö.; and Wallace, B.. “Genetic Variation in Financial Decision-Making.” Journal of Finance, 65 (2010), 17251754.
Chava, S., and Purnanandam, A.. “CEOs versus CFOs: Incentives and Corporate Policies.” Journal of Financial Economics, 97 (2010), 263278.
Chyz, J. “Personally Tax Aggressive Executives and Corporate Tax Sheltering.” Journal of Accounting and Economics, 56 (2013), 311328.
Coles, J. L.; Daniel, N. D.; and Naveen, L.. “Managerial Incentives and Risk-Taking.” Journal of Financial Economics, 79 (2006), 431468.
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), 613630.
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), 2040.
Cronqvist, H., and Siegel, S.. “The Origins of Savings Behavior.” Journal of Political Economy, 123 (2015), 123169.
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 356.
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), 449470.
Graham, J. R.; Harvey, C. R.; and Puri, M.. “Managerial Attitudes and Corporate Actions.” Journal of Financial Economics, 109 (2012), 103121.
Grinblatt, M., and Keloharju, M.. “Sensation Seeking, Overconfidence, and Trading Activity.” Journal of Finance, 64 (2009), 549578.
Guay, W. R. “The Sensitivity of CEO Wealth to Equity Risk: An Analysis of the Magnitude and Determinants.” Journal of Financial Economics, 53 (1999), 4371.
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), 247261.
Harford, J., and Li, K.. “Decoupling CEO Wealth and Firm Performance: The Case of Acquiring CEOs.” Journal of Finance, 62 (2007), 917949.
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), 174190.
Hirshleifer, D.; Low, A.; and Teoh, S. H.. “Are Overconfident CEOs Better Innovators?” Journal of Finance, 67 (2012), 14571498.
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).
Low, A. “Managerial Risk-Taking Behavior and Equity-Based Compensation.” Journal of Financial Economics, 92 (2009), 470490.
Malmendier, U., and Tate, G. A.. “Who Makes Acquisitions? CEO Overconfidence and the Market’s Reaction.” Journal of Financial Economics, 89 (2008), 2043.
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), 16871733.
McFall, M. C. “Lincoln National Aviation Mortality and Claim Analysis.” North American Actuarial Journal, 33 (1992), 68.
Moeller, S. B.; Schlingemann, F. P.; and Stulz, R. M.. “Firm Size and the Gains from Acquisitions.” Journal of Financial Economics, 73 (2004), 201228.
Pratt, J. W. “Risk Aversion in the Small and in the Large.” Econometrica, 32 (1964), 122136.
Prendergast, C. “The Tenuous Trade-Off Between Risk and Incentives.” Journal of Political Economy, 110 (2002), 10711102.
Rajan, R. G., and Zingales, L.. “What Do We Know about Capital Structure? Some Evidence from International Data.” Journal of Finance, 50 (1995), 14211460.
Rau, P. R., and Vermaelen, T.. “Glamour, Value and the Post-Acquisition Performance of Acquiring Firms.” Journal of Financial Economics, 49 (1998), 223253.
Roussanov, N., and Savor, P.. “Marriage and Managers’ Attitudes to Risk.” Management Science, 60 (2014), 24962508.
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), 1526815273.
Smith, C. W. Jr., and Stulz, R.. “The Determinants of Firms’ Hedging Policies.” Journal of Financial and Quantitative Analysis, 20 (1985), 391405.
Yermack, D. “Flights of Fancy: Corporate Jets, CEO Perquisites, and Inferior Shareholder Returns.” Journal of Financial Economics, 80 (2006), 211242.
Zuckerman, M. “Dimensions of Sensation Seeking.” Journal of Consulting and Clinical Psychology, 36 (1971), 4552.
Zuckerman, M. Sensation Seeking and Risky Behavior. Washington, DC: American Psychological Association (2007).
Type Description Title
PDF
Supplementary materials

Cain and McKeon supplementary material
Internet Appendix

 PDF (78 KB)
78 KB

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed