Powerful CEOs and Corporate Risk-Taking: Evidence from the CEO Pay Slice (CPS)
13 Pages Posted: 20 May 2014
Date Written: May 20, 2014
We explore the role of powerful CEOs on the extent of risk-taking, using Bebchuk, Cremers, and Peyer’s (2011) CEO pay slice (CPS). Based on more than 12,000 observations over 20 years (1992-2012), our results reveal a non-monotonic association. In particular, relatively less powerful CEOs exhibit risk aversion, resulting in less risky strategies. However, when the CEO has his power consolidated beyond a certain point, he is less likely to compromise with other executives, leading to less moderate decisions and more risky strategies. We estimate that the CEO has to wield considerable power, i.e. around the 75th percentile of CPS, before significantly more risk-taking is observed. Finally, we show that our results are unlikely vulnerable to endogeneity.
Keywords: CEO power, risk-taking, powerful CEOs, risk aversion, CEO pay slice
JEL Classification: G32, G34
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