CEO Social Status and Risk Taking

Abstract:     
I find that executive officers' relative concerns, or social comparisons, affect their risk taking. I use prestigious business awards assigned by editorials of major national publications (such as Business Week) to measure positive shocks to CEO status. I find that receiving a prestigious business award affects subsequent risk-related business decisions and outcomes. Firms with award-winning CEOs monotonically decrease their idiosyncratic volatility ratios and their industry betas converge to 1. R&D expenditure decreases by 20% while investment in physical assets increases relative to a matched sample of non-winning CEOs. I argue that CEOs who reach higher status, in terms of their reputation relative to their peers, have an incentive to conform. By increasing the correlation with respect to their reference group, CEOs with higher reputation lock-in their relative position and maximize their legacy.

Number of Pages in PDF File: 50

Keywords: Managerial Risk Taking, Relative Concerns, Reputation

JEL Classification: G30, G32

working papers series