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Management Characteristics and Corporate Risk-taking: An Overall Review

Article · January 2017


DOI: 10.12783/dteees/peem2016/5036

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2016 International Conference on Power, Energy Engineering and Management (PEEM 2016)
ISBN: 978-1-60595-324-3

Management Characteristics and Corporate Risk-taking:


An Overall Review
Kun SU, Rui-meng LI and Jing-fang WANG
School of Management, Northwestern Polytechnical University, No.1 Dongxiang Road, Xi’an,
710129, P.R. China

Keywords: Review, Management characteristics, Corporate risk-taking, Financial policies.

Abstract. We review the literature on the relationships between management characteristics and
corporate risk-taking over the period 1985~2015 and find that the two types of management
characteristics: the physical characteristics and the psychological ones lead to different risk-taking
behavior and firm outcomes. Generally, the physical traits have impact on taking risk by
psychological bias and the psychological traits affect risk-taking behavior directly. We also find that
the researchers always use the traits of CEO or top management as the proxies to explain
management behaviors.

Introduction
Corporate risk-taking is a value-added behavior of companies which play a fundamental role to
decision making and has crucial implications for firm outcomes and survival in a long run [1].
Corporate risk taking has previously been examined in terms of performance feedback [2], slack [3,
4], top management incentive systems[5-8], and environmental factors [9]. More recently, scholars
begin to shift their attention to the effect of the innate attributes of managers on their risk-taking
incentives, such as sensation seeking, overconfidence, education, military background,
depression-era life experiences, religious belief, and political affiliations [10-15]. In this paper, we
classify the CEO characteristics into two basic aspects: the physical and the psychological.

Prior Literature
Corporate Risk-Taking Measurement
With regards to the measurement of corporate risk-taking, there is a big variance among the
researches in various countries and industry department. Su (2015) argue that risk-taking
measurement can be classified into the 4 categories. Reference to Su, we posit 3 categories from
perspective of the source of risk-taking data: ①new indicators through further calculation based on
corporate profitability[16-18]. Strategic management and organization theorists have often depicted
risk as volatility of financial performance. A common proxy is the standard deviation of ROA and
Tobin’q [12, 19]. The standard deviation is chosen because it or its square, the variance, are
standard ex post measures of risk. Based on this, income stream risk based on profitability is the
most popular method to measure corporate risk-taking behavior [11, 16, 17, 20-24]. ②one or more
corporate behavior as the proxies of risk-taking behavior [25]. Previous researchers show the
positive relationship between some organization behaviors and corporate risk-taking. For example,
some researchers choose the acquisition propensity as the proxy of risk-taking behavior [7, 26].
R&D expenditure is also a common proxy as the measurement of corporate risk-taking [8, 27]. In
addition, Li & Tang (2010) and Greve (2003) utilize the activity of launching innovative products
as the risk-taking proxy and predict the impact of CEO hubris on firm risk taking in the context of
China [2, 28]. ③designing experiments or modeling to attain the risk-taking variables. For
instance, scholars measure risk aversion directly, subjects were presented with several choices [29,
30]. Additionally, scholars build up new index to measure risk-taking behavior. Reference to the
methods in financial early-warning, scholars created new index Altman’s Z-score [31, 32].  The
measurement of corporate risk-taking are showed in Table I.
Management Characteristics and Risk-Taking Behavior
The findings suggest that kinds of heterogeneities of management significantly affect corporate risk
propensity. Upper echelons theory argue the variance in physical and psychological traits of top
managers make the different perceptions generate due to different corporate environment, which
further explain the bias in the strategies[33]. We classify the characteristics into two main branches:
the physical branch and the psychological branch which will be introduced respectively.
Table 1. Risk-taking measurement.
  Method  Author 
I income stream risk  Bettis & Mahajan (1985); Miller & Chen (2004); Boubakri, Cosset & Saffar (2012);
(based on profitability)  Elsaid (2012);John, Litov and Yeung (2008); Hilary and Hui (2009); Acharya,
Amihud and Litov (2011); Faccio, Marchica and Mura (2011);Koerniadi et al
(2014) , Jiang (2012) ; Nakano& Nguyen (2012); Bertrand& Schoar (2003) 
Tobin’s Q  Benmelech& Frydman (2014); Malmendier& Nagel (2009) 
diversification  Sanders (2001); Serfling (2012) 
acquisition  Sanders (2001); Benmelech& Frydman (2013) 
Yim (2012); Bertrand& Schoar (2003) 
R&D expenditure  Hoskisson et al. (1993); Serfling (2012); Coles, Daniel, & Naveen, (2006);
Benmelech& Frydman (2013); Bertrand& Schoar (2003) 
innovative products  Greve (2003), Li & Tang (2010) 
corporate cash holding  Zeng & Wang (2014) 
II
market-based measures   Peltomäki, Swidler, & Vähämaa (2015) 
Karagiannidis (2012) 
financial instance  Powell & Ansic (1997) 
financial leverage  Kim & Kamiya(2015); Serfling(2012);  
Benmelech& Frydman (2013); Bertrand& Schoar (2003) 
Chen, Zhang & Liu (2014); Zhou& Wang (2014) 
tax avoidance  Christensen et al. (2014) 
III new index  Xu & Zhang (2009); Nakano & Nguyen (2012); Cesarini, et al (2010);
Holt and Laury (2002) 

Physical Characteristics and Risk-Taking


According to our review, we classify management physical traits into there categories, they are age,
gene, and experience. The literature relative to CEO physical characteristics and corporate
risk-taking are showed in Table II.
Table 2. Physical traits.
  Category  Author 
Age    Scharfstein and Stein (1990); Yim (2013);Elsaid (2012);
Serfling(2012,2014); Peltomäki,Swidler&Vähämaa (2015);  
Genetic  gender  Lam, McGuinness &Vieito (2012);Huang&Kisgen(2012;  
Zeng&Wang(2014); Powell&Ansic (1997) 
gene  David et al.(2009); Cronqvist &Siegel(2014);Barnea, Cronqvist &
Siegel (2010) 
testosterone  Kim & Kamiya(2015) 
Experience  education  Yang (2014); He&Su(2012); 
Zhou&Wang(2014); Bertrand&Schoar(2003); Karagiannidis (2012);  
career  Li & Zhang (2007); Custódio and Metzger (2013);  
Hao,Chou & Ko (2015) 
macro-  Malmendier&Nagel (2009); Hao,Chou & Ko (2015);  
environment 
events  Benmelech&Frydman (2013); Bernile,Bhagwat&Rau(2014);
Nicolosi&Yore(2015); Roussanov& Savor (2013) 
Prior theoretical work predicts that age of top managers impacts their risk preferences and
risk-taking behavior, but predictions are mixed due to different perspectives. Based on the two
ambiguous strands, we conclude that if career concerns dominate, there should be a positive relation
between CEO age and risk-taking behavior; otherwise if the signaling explanation dominates, there
should be a negative relation between CEO age and risk-taking behavior.
One another physical characteristic of managers is about gene which do not change with age, but
be born genetically, such as gender [34, 35], gene [29, 36], testosterone [37]. Prior researches
investigate management gender and show that gender is a significant traits influencing corporate
risk-taking. A large part of literatures argue that compared to male managers, female managers
show more risk-averse and lead to risk-taking deficiency of their companies. As to the gene force,
researches have been designed among matching a large number of twins from the data set and find
evidences which support their hypothesis that the gene of managers explain their risk propensity to
some extent [36]. For instance, Barnea, Cronqvist and Siegel (2010) argue genetic factor explains
about one-third of the variance in stock market participation and asset allocation [38]. Although
family environment has an effect on the behavior of young individuals, but this effect is not
long-lasting and disappears as an individual gains experience. However, work experience with
finance reduces genetic predispositions to investment biases [39]. A recent literature examines how
personal experiences affect managers’ beliefs, financial decisions and willingness to take risk [13,
40, 41].
Summarizing the literature, the experience can be classified into macro-environment aspect and
personal aspect. Hao (2015) argues that macroeconomic events have a long-lasting influence on
individual’s preference for taking risk. For example, CEOs who experienced the reform and
open-up in early adulthood tend to have higher likelihood of risk taking and more risk preference
than CEOs who were grow-up in central planning era experienced economic recessions. The
personal experience is including the events managers have experienced, such as educational and
career background [42]; military background [12]; marital status [43-45]; early-life disasters [46].
The literature is somehow for a deficiency of systematic and comprehensive. However, it provides
evidence to the relationship between experience and corporate risk-taking.
Psychological Bias and Risk-Taking
A recent literature on corporate finance examines how managers’ psychological biases affect firm
decisions making [47]. Psychological bias of management may generate from physical. Yim (2013)
argue that psychological changes may occur with age [26]. For example, Bertrand and Mullainathan
(2003) argue that CEOs have a preference for the quiet life [48]. This preference is likely increased
with time (age).
There are numerous characteristics that can potentially change with age or other physical
characteristics and affect a CEO’s risk propensity. These could potentially include any
psychological: overconfidence [49], optimism [50], hubris [28], narcissism [51], herd behavior [52],
and culture heritage [53]. The literature on psychological characteristics and corporate risk-taking
are shown in Table III.
Behavioral decision theory suggests that hubris or overconfidence, as one type of cognitive bias,
encourages decision makers to overestimate their own problem-solving capabilities [54],
underestimate the resource requirements of risky initiatives [55], and underestimate the
uncertainties facing their firms [56]. More importantly, people’s psychological bias may generate
the mode of thinking, the outlook on world, life and values which further influence one’s
decision-making and other behaviors. This kind of bias may be derived from culture which is learnt
and transmitted socially, by parents to their children, between peers, and in an oblique way by
society as a whole [57]. Pan, Siegel and Wang (2014) argue that in the context of U.S. cultural
background, CEOs’ uncertainty avoidance negatively affects corporate investment, and the effect is
larger for acquisitions than for capital expenditures [53].
The reviews of prior literature suggest that overconfidence portrays a significantly positive
impact on firm-level decision-making behavior [58]. However, it will do harm to firms’ long-term
performance and make firms taking much more excessive risk.
Table 3. Psychological trait.
Trait  Author 
Overconfidence  Goel&Thakor(2008);Hirshleifer,Low&Teoh 
(2008); Doukas&Petmezas (2007) 
Hubris  Li&Tang (2010) 
Narcissism  Gerstner et al. (2013) 
Optimism  Heaton (2002) 
Herd behavior  Scharfstein & Stein (1990) 
Cultural   Pan, Siegel & Wang (2014) 

Summary
We have reviewed the literature on the relationship between management characteristics and
corporate risk-taking over the period 1985~2015. We review the management characteristics in
physical traits and psychological traits respectively. The traits which lead to different risk-taking
behavior and firm performance work through different channels. Generally, the physical traits have
impact on taking risk by psychological change and the psychological traits affect risk-taking
directly. Additionally, researchers always use CEO or top management traits as the proxies to
investigate management behaviors. And many researchers suggest that some moderators can affect
the relationship between management characteristics and firm financial policies.

Acknowledgment
This research was financially supported by National Natural Science Foundation of China
(71402141), the Humanity and Social Science Youth Foundation of the Ministry of Education of
China (14YJC790103), the Natural Science Foundation of Shaanxi Province (2014JQ9370), the
Social Science Foundation of Shaanxi Province (13D211), Postdoctoral Science Foundation of
China (2015M582705) and the Fundamental Research Funds for the Central Universities
(3102014RW0004) and the Seed Foundation of Innovation and Creation for Graduate Students in
Northwestern Polytechnical University (Z2015038)

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