CEOs Personal Risk Attitudes and Corporate Financing and Investment Policies

What are the major determinants of corporate finance decisions? Classical theories emphasize firm-, industry-, and market-related factors whereas recent studies find relatively weak support to these theories and suggest that further research is needed. A new trend in corporate finance research emphasizes the role of managers and their individual preferences and beliefs. This project attempts to answer to what extend firm policies are affected by CEOs' personal attitudes towards risk. Specifically, we document the relation between CEOs' personal decision and their corporate policies.

This project studies to what extent firm policies are affected by managers? personal assets allocation, asset allocation, and founders' opportunity cost. We contribute to the literature by providing empirical evidence on the role of managers in corporate policies. In addition, our comprehensive data set allow us to alleviate endogeneity concerns by investigating how changes in CEO's personal risk preferences and wealth shape firm policies within CEO-firm pairs. Our research improves our understanding of the determinants of firm policies. Our findings for the hedging hypothesis provide a deeper insight on managerial incentives and corporate governance design that ensures corporate resources are used to maximize stakeholder value instead of managerial personal risk management and personal wealth.

This project tries to improve our understanding on the determinants of firm policies by using a unique data set to reconsider to what extend firm policies are affected by CEOs' personal risk attitudes. First, in addition to the detailed firm and CEO characteristics, our data set consists of CEO non-firm wealth, liabilities, and monthly portfolio holdings, which are considered unobservable in most of countries in the world. This unique data set provides us accurate measures for managers' risk preference than using experiment data or proxies. Second, existing literature suffers from a major problem of not being able to distinguish between whether there is behavioral consistency in CEOs' personal and corporate decisions or if managers adjust their outside portfolios to hedge against their exposure to firm risk. Our rich data set allows us to observe both personal and firm risk and therefore enables us to properly test different hypotheses on how managers' personal characteristics shape firm policies. Third, recent studies are usually limited to the cross-sectional analyses. In contrast, we have a panel data of 20 years with changes in personal portfolio, which allows us to investigate a change in the risk aversion of CEOs due to change of their marital status and kids on the policies of the firm they are running. This strategy together with some other identification strategies we propose minimize concerns related to endogenous matching or other issues that complicate establishing causality. Fourth, in addition to public firms, our data set also covers private firms and full ownership that are both ignored in most of the literature due to data availability. Overall, the results of this project would be useful for boards, investors, and regulators. For example, our research would improve boards' decision on management selection and monitoring, help investors to understand firm risk profile and provide insights for regulators considering corporate governance rules.