CEO Social Capital, Risk-Taking and Corporate Policies

Abstract

We provide the first direct empirical evidence of the effect of CEO social capital on aggregate corporate risk-taking. Our theory predicts that CEOs with high social capital display higher levels of risk-seeking behavior. Consistent with this prediction, we find a positive association between CEO social capital and aggregate corporate risk-taking. Examining the channel, we show that social ties cause corporate policy actions, and these actions lead to greater volatilities in stock returns and earnings. In addition, we uncover a number of factors that significantly moderate the effects of social capital on risk-taking. We also show that this increase in risk-taking is value-enhancing to the firm. Our results are robust to alternative proxies for risk-taking, alternative model specifications, and tests for endogeneity.

Keywords: Social Capital; Social Networks; Corporate Risk-Taking

JEL Classification: G30; Z13