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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)
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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