Three essays on determinants of managerial risk-taking and its consequences

Huang, Xinhe 2025. Three essays on determinants of managerial risk-taking and its consequences. PhD Thesis, Cardiff University. Item availability restricted.

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Abstract

This thesis consists of three essays on the determinants of managerial risk-taking and its consequences in the US context. The first essay investigates whether sensation-seeking chief executive officers (CEOs) affect firms’ bankruptcy risk in the US market. Using the hand-collected data of sensation-seeking CEOs, we find that firms with such CEOs are more likely to file for bankruptcy than those with non-sensation-seeking CEOs. The positive association between sensation-seeking CEOs and bankruptcy risk holds after controlling for CEO characteristics, dropping firms in the aviation industry, keeping financial and utility industries, and excluding the dot-com bubble and global financial crisis periods. Our results are unchanged after using propensity score matching and univariate PSM-difference-in-difference (DiD) to address the endogeneity issues. We explain this positive impact of sensation-seeking CEOs on firms’ bankruptcy risk by showing that firms led by sensation-seeking CEOs are more likely to adopt risky investment strategies and more aggressive accounting practices. Furthermore, this positive association is more pronounced for firms with a lower likelihood of hostile takeover, lower analyst coverage, and lower institutional ownership. Overall, our results are consistent with previous evidence that sensation-seeking CEOs are more risk-tolerant and, thus, are more likely to underestimate the riskiness of corporate policies and accept inefficient investment decisions, engendering the formation of bankruptcy. The second essay investigates whether firms led by sensation-seeking CEOs are more likely to have higher stock price crash risk. Using hand-collected data of CEOs’ pilot licences to proxy for the sensation-seeking personality trait, we show that firms with sensation-seeking CEOs exhibit higher stock price crash risk. This result holds after addressing endogeneity concerns, using propensity score matching and several DiD tests. We explain this result by showing that sensation-seeking CEOs are more likely to hide bad news by using real earnings management and induce bad news by choosing operating segments with higher systematic risk due to their career and personal diversification concerns. This positive impact of sensation-seeking on stock price crash risk appears to be prominent in firms led by CEOs with low managerial ability. We then provide evidence that market reaction is positive for firms led by sensation-seeking CEOs, indicating that outside investors value and recognise them. Additionally, this positive association between sensation-seeking CEOs and stock price crash risk is more pronounced for misvalued firms. These results suggest that outsiders are more likely to recognise sensation-seeking CEOs; however, they fail to appropriately value them. These misvaluations are more likely to force sensation-seeking CEOs to withhold negative information, consequently inducing higher stock price crash risk. Finally, we provide evidence that this positive association between sensation-seeking CEOs and stock price crash risk is more pronounced for firms with lower competitive threats. Overall, our results show that a salient personality trait, a sensation-seeking personality trait, induces firms to have higher stock price crash risk. The third essay investigates whether fringe benefits are more likely to incentivise top-paid executives to engage in managerial risk-taking and its consequences. This essay uses plausibly exogenous variation in executives’ loyalty to show that firms seek to move their top-paid executives ‘from disloyalty to loyalty’ through awarding fringe benefits. We show that fringe benefits can decrease disloyal executives’ mobility and incentivise managers to change positive firm risk. These results are robust after performing a variety of robustness tests such as (i) alternative sampling (e.g., excluding $1 salary executives, the Delaware-incorporated cohort, market over-volatile periods, using alternative windows of stack DiD); (ii) the additional control variable (e.g., risk-taking incentives); (iii) the additional fixed effect; (iv) the alternative model specification; (v) PSM; (vi) an alternative instrumental variable, and (vii) carefully examining exclusion restriction assumption. We explain these results by showing that top-paid executives with higher fringe benefits are more likely to decrease cash holdings to invest in research and development (R&D) and capital expenditures. Finally, executives with higher fringe benefits are more likely to enhance firms’ operating performance, total factor productivity, and non-labour, labour investment, and total efficiency. These results support our argument that fringe benefits can increase the job satisfaction of corporate executives and incentivise them to undertake value-enhancing risky corporate investments, thereby increasing firms’ efficiency.

Item Type:	Thesis (PhD)
Date Type:	Acceptance
Status:	Unpublished
Schools:	Schools > Business (Including Economics)
Date of Acceptance:	23 January 2025
Last Modified:	13 Mar 2025 15:15
URI:	https://orca.cardiff.ac.uk/id/eprint/176853

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