For the last five
weeks, we have been decomposing the important characteristics of the CEO and exposing
their impact on the CEO’s risk aversion. Today, we will summarize our findings in a structured way. Below, we list the considered four major characteristics of the CEO: age, gender, marital status and cultural heritage.
In 2014, J. Estrada (2014) did research on the strategies investors take regarding their ending wealth as a function of their age, stating 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. The paper concluded that investors will end up with a higher ending wealth if they follow the contrarian strategies, investing in riskier assets early in their lifecycle. Whilst bearing more risk, which in fact is caused by a bigger volatility regarding the upside potential, the contrarian strategies outperformed the lifecycle strategy in a significant way.
The conclusions from the Estrada paper suggest CEO’s should take higher risks closer to retirement. This raised the question of this also applies for companies and their capital structure. Do CEO's on average gear up their firm when getting closer to retirement?
The fight this inequality, procedural quotas are implemented by Belgian and European legislators to lock down a minimum portion of women in the board of directors. Since governments all over the world are attempting to achieve an equilibrium between men and women in leadership positions, many academics have wondered what the impact of gender diversity could be on the riskiness and overall profitability of a firm. Did the implementation of women quotas in boards actually do any good?
Age CEO
Many studies have been conducted 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.In 2014, J. Estrada (2014) did research on the strategies investors take regarding their ending wealth as a function of their age, stating 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. The paper concluded that investors will end up with a higher ending wealth if they follow the contrarian strategies, investing in riskier assets early in their lifecycle. Whilst bearing more risk, which in fact is caused by a bigger volatility regarding the upside potential, the contrarian strategies outperformed the lifecycle strategy in a significant way.
The conclusions from the Estrada paper suggest CEO’s should take higher risks closer to retirement. This raised the question of this also applies for companies and their capital structure. Do CEO's on average gear up their firm when getting closer to retirement?
Gender CEO
Throughout the years, numerous parties (e.g. trade unions, governments, human rights associations) have shown interest in the proportion of men and women in leadership positions. In fact, the issue of gender differences in the behavior during the work process became more and more relevant as more women got in charge of big successful companies. Still, globally men occupy more seats in the board of directors than women.The fight this inequality, procedural quotas are implemented by Belgian and European legislators to lock down a minimum portion of women in the board of directors. Since governments all over the world are attempting to achieve an equilibrium between men and women in leadership positions, many academics have wondered what the impact of gender diversity could be on the riskiness and overall profitability of a firm. Did the implementation of women quotas in boards actually do any good?
Numerous papers investigated the effect of gender differences in risk-taking dealing with corporate capital structure, proxied by debt-to-equity ratio. The results reject the hypothesis that CEO’s gender negatively influences riskiness of firm’s capital. That said, the share of female members in the board has a noticeable negative impact on the corporate capital structure. This is conforming the hypothesis that woman tend to be more careful and take less risks than men, resulting in a more cooperative feeling in the firm, a less leveraged capital structure and overall better performance.
Marital status CEO
Academics have shown that the stocks of companies with CEOs who are single are riskier than companies with married CEOs. Single CEOs tend to spend more money on R&D and acquisitions. Both investments are risky, meaning that they can either result in growth or a lot of trouble. The stock is therefore more volatile and thus riskier.
Cultural heritage CEO
Finally, we have raised the attention to the significant impact of the cultural heritage of the CEO its risk aversion. Overall, we have seen that on average developing countries are more risk averse than developed countries. Additionally, we have exposed a significant association between culturally (heritage) transmitted risk preferences of CEOs and corporate investments. CEOs of firms located in countries with higher levels of risk aversion, on average go for a less risky capital structure and policy by diversifying more, doing less takeover activities and restraining the gearing ratio.
The CEO characteristics listed above will helped us better understand the dynamics behind the relative risk aversion of a CEO in a company. A profound insight in the thoughts and feelings towards risk by the CEO was essential to obtain a sufficient optimal set of parameters for the regression of the CEO's characteristics on the capital structure. All in all,
