What doesn’t kill you will only make you more risk-loving: early-life disasters and CEO behaviour (2017)

“…the link between CEOs’ disaster experience and corporate policies has real economic consequences on firm risk and its cost of capital.”

Bernile, G., Bhagwat, V., Rau, P. R.
The Journal of Finance, 72(1), 167-206
Image: Bureau of Land Management / Wikimedia Commons

“There is a growing consensus that CEOs’ past experiences in life account for much of the variation in corporate risk-taking”

“A unifying thread […] is the notion that exposure to a particular life experience has a unidirectional effect on a CEO’s risk-taking propensity and hence on corporate policies.”

“…traumatic experiences predict high stress levels long after the events, with exposure to natural disasters in particular shown to have large and lasting effects on individuals.”

“Closer to our focus, prior evidence also shows that natural disaster exposure affects the short-run financial decision of both individuals and firms, and that natural disaster experiences have long-lasting effects on investor portfolio decisions.”

“The literature on managerial style posits a linear relation between a chief executive officer’s (CEOs) past experiences and firm risk.”

The abstract claims the paper “…shows that there is a nonmonotonic relation between the intensity of CEOs’ early-life exposure to fatal disasters and corporate risk-taking. CEOs who experience fatal disasters without extremely negative consequences lead firms that behave more aggressively, whereas CEOs who witness the extreme downside of disasters behave more conservatively.

“These patterns manifest across various corporate policies including leverage, cash holdings, and acquisition activity. Ultimately, the link between CEOs’ disaster experience and corporate policies has real economic consequences on firm riskiness and cost of capital.”

“…results support the view that experiencing fatal disasters without extreme consequences desensitizes CEOs to the negative consequences of risk. In contrast, CEOs who experienced extreme fatal disasters and witnessed the downside potential of risky situations appear to be more cautious in approaching risk when at the helm of a firm.”

You can read the full paper here: What Doesn’t Kill You Will Only Make You More Risk-Loving: Early-Life Disasters and CEO Behavior