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CEO's Total Wealth Characteristics and Implications on Firm Risk

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  • Timo Korkeamäki
  • Eva Liljeblom
  • Daniel Pasternack

Abstract

We study the connections between firm risk and the CEO's personal wealth characteristics, using a unique dataset on CEO wealth and its components. Consistent with decreasing absolute risk aversion, we find that wealthier CEOs are associated with higher risk firms. Riskier firms tend to have CEOs whose wealth is more independent of the firm. We also find that CEOs with high personal portfolio betas run firms with higher betas. CEO's tenure is negatively associated with firm risk measured either as beta, idiosynchratic risk, or volatility of accounting profitability. A possible interpretation is that risk†averse managers are better able to imprint their risk preferences on the firm over time. Stronger corporate governance weakens the connection between CEO wealth characteristics and firm risk.

Suggested Citation

  • Timo Korkeamäki & Eva Liljeblom & Daniel Pasternack, 2018. "CEO's Total Wealth Characteristics and Implications on Firm Risk," International Review of Finance, International Review of Finance Ltd., vol. 18(1), pages 35-58, March.
    • Handle: RePEc:bla:irvfin:v:18:y:2018:i:1:p:35-58
    DOI: 10.1111/irfi.12139
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    Cited by:

    1. repec:zbw:bofrdp:2015_005 is not listed on IDEAS
    2. Jokivuolle, Esa & Keppo, Jussi & Yuan, Xuchuan, 2015. "Bonus caps, deferrals and bankers' risk-taking," Research Discussion Papers 5/2015, Bank of Finland.
    3. repec:zbw:bofrdp:2014_002 is not listed on IDEAS
    4. Jokivuolle, Esa & Keppo, Jussi, 2014. "Bankers' compensation: : Sprint swimming in short bonus pools?," Research Discussion Papers 2/2014, Bank of Finland.

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