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May Bad Luck Be Without You: The Effect of CEO Luck on Strategic Risk-taking

Author

Listed:
  • Pascal Flurin Meier

    (Department of Business Administration, University of Zurich)

  • Raphael Flepp

    (Department of Business Administration, University of Zurich)

  • David Oesch

    (Department of Business Administration, University of Zurich)

Abstract

We investigate how luck, namely, changes in a firm’s performance beyond the CEO’s control, affects strategic risk-taking. Fusing upper echelons theory with insights from psychology and behavioral strategy research, we hypothesize that there is a positive association between luck and strategic risk-taking and that this effect is stronger for bad luck than for good luck. We further argue that these effects vary depending on whether CEOs have experienced negative events earlier in their professional careers. Measuring luck as the exogenous component of recent firm performance, we show empirically that CEOs react to bad luck by adopting more conservative risk-taking policies while showing no reactions to good luck. This effect predictably varies with the strength of bad luck signals, and it is stronger for CEOs who have experienced negative events during their professional careers. We contribute to the literature by providing the first evidence on the role of luck in corporate strategic risk-taking.

Suggested Citation

  • Pascal Flurin Meier & Raphael Flepp & David Oesch, 2022. "May Bad Luck Be Without You: The Effect of CEO Luck on Strategic Risk-taking," Working Papers 393, University of Zurich, Department of Business Administration (IBW).
    • Handle: RePEc:zrh:wpaper:393
    as

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    References listed on IDEAS

    as
    1. Guiso, Luigi & Sapienza, Paola & Zingales, Luigi, 2018. "Time varying risk aversion," Journal of Financial Economics, Elsevier, vol. 128(3), pages 403-421.
    2. Brian L. Connelly & Qiang (John) Li & Wei Shi & Kang‐Bok Lee, 2020. "CEO dismissal: Consequences for the strategic risk taking of competitor CEOs," Strategic Management Journal, Wiley Blackwell, vol. 41(11), pages 2092-2125, November.
    3. Yan Zhang, 2008. "Information asymmetry and the dismissal of newly appointed CEOs: an empirical investigation," Strategic Management Journal, Wiley Blackwell, vol. 29(8), pages 859-872, August.
    4. David Souder & Philip Bromiley, 2012. "Explaining temporal orientation: Evidence from the durability of firms' capital investments," Strategic Management Journal, Wiley Blackwell, vol. 33(5), pages 550-569, May.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Strategic Risk-Taking; Chief Executive Offers; Luck; Upper Echelons; Behavioral Strategy;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M10 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - General
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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