Age, a matter of importance in the CEO's decisions?

A question our team has asked and are curious to answer is whether the age of the CEO has an impact on how they assess risk and this being seen on the capital structure they apply regarding taking leverage or not.

Many studies have been taken place to see if a younger CEO will take more risks than an older CEO or that the same CEO at an early stage of its leadership will take riskier investments or more leverage on their capital structure than if they were towards their retirement.

A paper we had a look at called “The Glidepath Illusion: An International Perspective” by Javier Estrada (2014) shows the strategies investors take regarding their ending wealth as a function of their age. It states that most of the investors tend to follow a so-called lifecycle strategy, which starts investing strong on risky assets and as the person gets closer to retirement, it fully invests on less riskier assets.

On the other hand, we find the so-called contrarian strategies. These are mirror strategies to the lifecycle ones, meaning being more conservative at an early age and more aggressive towards retirement. Now, the question is: which of these strategies are best?

The paper concludes that investors will end up with a higher ending wealth if they follow the contrarian strategies. It is true that these strategies are more risky, having higher volatility figures, but this is regarding the upside potential. The downside potential gives better results for the contrarian strategies meaning these strategies must be taken place instead.

In our study we want to figure out the impact the CEO’s personal information such as age, gender, and nationality among others. What can be related between this paper and what we want to study?

Other papers that we will mention along the paper and later on this blog suggest that younger CEO’s take bigger risks than older CEO’s. One has less to lose at a younger age and less fear to failure. Conclusions from the Estrada paper suggest CEO’s take opposite strategies and that the CEO’s should take higher risks closer to retirement as this will make the company more profitable on average as the downside potential is more limited. Later with our findings we will see if Estrada and many other practitioners were correct or not with their results.

Please press the link below to have a better understanding of Estrada's paper.