Wrinkles of Experience: CEO Age and Abnormal Investment

Abstract

Firms led by older CEOs significantly reduce their abnormal investment, defined as the deviation from the expected investment levels derived from a Q-theory model. CEOs in the top age tercile are associated with a 4.4% (or approximately $669 million) decline in abnormal investment, driven primarily by reduced overinvestment. This finding is robust to the inclusion of firm- and CEO-level characteristics and potential endogeneity concerns, and is distinct from CEO compensation-based risk-taking incentives, overconfidence, talent, and managerial abilities. CEO recession experience likely serves as a channel through which older CEOs mitigate overinvestment. Overall, the results show that CEO age and recession experience play a significant role in shaping corporate investment policy.

Keywords: CEO Age, Overinvestment, Underinvestment, Q-Theory, Risk-Taking Incentives, Overconfidence, Recession Experience

JEL Classification: G31, G32, G34