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CEO personal investment decisions and firm risk
Author(s) -
Cen Wei,
Doukas John A.
Publication year - 2017
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/eufm.12117
Subject(s) - business , compensation (psychology) , robustness (evolution) , consistency (knowledge bases) , preference , investment (military) , actuarial science , risk aversion (psychology) , financial crisis , financial risk , natural experiment , finance , economics , microeconomics , expected utility hypothesis , financial economics , psychology , social psychology , biochemistry , chemistry , geometry , mathematics , macroeconomics , politics , political science , law , gene , statistics
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.