CEO Relative Age and Corporate Risk-Taking

Abstract

We investigate the effect of CEO relative age, an early-life measure defined as age relative to others in the same school cohort determined by the cutoff date policy at primary school entry, on corporate risk-taking. We base our analysis on the arguable randomness of managers’ birth months and a novel data set containing the birth month information of 2,595 CEOs from 1,011 Chinese listed firms. We find that firms with “relatively older” CEOs, i.e., those who were older than their classmates at school entry, compared with firms with “relatively younger” CEOs, have greater volatility in their profitability and stock returns, use debt financing more aggressively, engage in more diversifying and valuedestroying acquisitions, and experience deteriorating performance and higher crash risks. The results are robust to a battery of alternative specifications. Our additional tests suggest that the overconfidence of relatively older CEOs explains our findings.

Keywords: relative age effect, risk-taking, CEO, overconfidence

JEL Classification: G11 G32 G34 G41