A CEO’s inclination, or aversion, to risk is a key issue for corporate boards looking to preserve the long-term growth of their companies and to incentivize the type of strategies they feel are best for spurring such expansion.
In their paper, “Status, Marriage and Managers’ Attitudes to Risk,” Wharton finance professor Nikolai Roussanov and co-author Pavel G. Savor, a professor at Temple University’s Fox School of Business, study the role that marital status plays in the investment decisions of CEOs. They find that bachelors (or bachelorettes) tend to be more aggressive in their behavior, while those who have walked down the aisle are often more cautious.
In this video interview with Knowledge at Wharton, Roussanov discusses how the findings can be applied to a company’s search for a new leader, the role divorce laws played in the research and how the study’s conclusions have potential implications far beyond the chief executive’s office.
An edited transcript of the conversation appears below.
Knowledge at Wharton: What are the key questions you’re trying to address in this research?
Nikolai Roussanov: In finance we’re very interested in understanding the role that risk and attitudes to risk play in determining investment behavior, which is obviously very important for long-run economic growth. My co-author, Pavel Savor, and I were particularly interested in understanding [how] marital status and changes to marital status over an individual’s life can affect important risk-taking decisions. Generally, marital status is not something that is thought of as an important determinant of economic decisions and, in particular, risk-taking decisions. However, there are reasons shaped by both economic and psychological forces to think that it may indeed be important.
… We looked at … the risk-taking decisions of CEOs of public companies in the U.S. We collected data [about the] marital status of CEOs of the 1,500 largest public companies and looked at the differences in behavior of these firms — of the firms that were led by CEOs who were single and those who were married.
“A person’s individual characteristics and … individual life cycle matter for the decisions that they make on behalf not of just their families [or] themselves, but also on behalf of the firms that they lead.”
Knowledge at Wharton: What were the key takeaways of your research?
Roussanov: What we found was that firms led by single CEOs engaged in much more aggressive investment behavior, along the lines of capital expenditures, as well as innovation activity, research and development, and acquisitions to some extent, than companies led by CEOs who were married. These differences translated also into greater riskiness of the firms led by single CEOs as measured by the stock return volatility.
Knowledge at Wharton: What conclusions from the research were of the greatest surprise to you?
Roussanov: What was surprising to us was how large the magnitudes of these differences were. What we found was that, when not accounting for various differences between the two types of firms, you could see that firms led by single CEOs invest almost 75% more as a … share of their current assets in various firm-building activities, such as capital expenditures or research and development. Part of that difference is attributable to the fact that the firms that single CEOs run tend to be smaller, younger firms. These tend to grow faster and therefore invest more.
However, even after accounting for the variety of differences in these two types of firms that we can observe, we find that there is a still sizable difference — about 10% greater investment by firms led by single CEOs compared to firms run by CEOs who are married. And differences in stock return volatility are also quite substantial.
Knowledge at Wharton: What are some of the practical implications of your findings, either for businesses or for the CEOs themselves?
Roussanov: Well, the key practical implication is that a person’s individual characteristics and … individual life cycle matter for the decisions that they make on behalf not of just their families [or] themselves, but also on behalf of the firms that they lead. And therefore, one may need to be aware of the personal situation that a leader or a company or a manager has because that is going to shape their risk taking decisions and the investment decisions that they’re going to be facing.
“Managerial decisions are affected by what is happening in those individual’s personal lives in ways that most of our views of business decision making do not account for.”
Knowledge at Wharton: Why do you think that being single vs. married shapes CEOs’ risk-taking behavior? What is it about that particular life change that impacts investment behavior?
Roussanov: …. One reason to believe that marital status shapes risk-taking decisions has to do with the economics of marriage…. Single individuals [are] clearly competing for potential mates with other single individuals, and one of the important factors in that competition is socio-economic status. Even at the high end of the wealth distribution — which is where most of the CEOs are — how much wealth you have, how successful you are, matters potentially for your prospects. And that, potentially, could be one of the drivers.
Another potential driver is, of course, that people who are married have a family, they’re more risk averse simply because they have a family to provide for and they’re just more cautious and more careful. We’re not sure if that is as important enough of a concern for the [kind of] wealthy individuals that CEOs tend to be, but it is a potential concern. Something that is kind of in between [those two possibilities] is a psychological, almost evolutionary biology shaped driver. There is evidence, in fact, in evolutionary biology that suggests that single men in particular are more aggressive and are willing to take more risk. That may be related, to some extent, to our status story but it could be a purely biological driver that we’re not able, of course, to identify.
Knowledge at Wharton: Let’s say I’m on a corporate board and I’m looking for a new CEO. What new rules, procedural changes or strategies would you suggest to me as a result of this research?
Roussanov: It’s an interesting question how much boards can actually take into account the manager’s personal life circumstances in hiring or firing them. To some extent it is not entirely legal to do so. However, in determining the compensation package that the CEO will receive, in particular how much incentive compensation to reward the CEO, for example, in the form of options, clearly it matters how risk tolerant or risk averse the CEO is. And therefore, knowing their personal situation, knowing something about their marital status, whether they are indeed in the search for a spouse or not, may impact how sensitive that compensation package that the CEO will receive is to the performance of the firm. And therefore, how much the firm wants to encourage the CEO to take more or less risk because a married CEO who is leading a fast-growing firm may be potentially overly cautious and [the board] may need to incentivize that person with particular options to take more risk.
On the other hand, you could have a young single CEO of a firm whose investment opportunities are not that great, or in a firm that needs to grow [in] a more conservative fashion. [In that case,] you may want to scale down the risk appetite of the CEO by appropriately shaping their pay package.
Knowledge at Wharton: How could this research apply beyond the world of CEOs and corporate boards?
Roussanov: I think these results have potentially very wide applicability throughout the business world. We focused on the CEOs because this is one of the settings where the stakes are potentially as large as they can get and finding an effect there, in some sense, is the most surprising. However, we can think of managers … at lower levels who still make risk-taking decisions. We can think of … the money management industry where risk is everything. And risk taking decisions there are very central. In the money management industry, the trade-off between risk and return is the key determinant of success. And therefore, we should expect the same type of forces acting there as well.
Knowledge at Wharton: Are there any misperceptions held by the public, the media or others that you think your study dispels or addresses?
Roussanov: I think there is potentially the misconception that economists help perpetuate that managers are automatons and machines that do the right thing. They’re rational maximizers of something. The question is what that something is, of course. What we are adding to this picture is that managerial decisions are affected by what is happening in those individuals’ personal lives in ways that most of our views of business decision making does not account for.
“In community property states, where indeed the CEOs are more likely to be single … CEOs are also … more willing to invest in the firm and take greater risks.”
Knowledge at Wharton: Could you talk a little more about what you think sets this particular research apart from other analysis on this topic?
Roussanov: Well, nobody … has looked at the effect of marital status on the decisions of CEOs, but there is a large field of study that tries to understand the role of CEO characteristics in driving firm outcomes. What I think is particularly important about our approach is that we’re looking at a characteristic that is not an inherent personal trait of an individual like, some life experience they obtain early in their life or some particular immutable thing like race or gender.
What we are interested in is how a characteristic that is inherently changing over time is affecting individual’s behavior. Now, one could say that what we observe in the data is that there are some individuals who are inherently more risk tolerant. They also tend to be more likely to stay single. And there are others who are somehow more conservative, and they’re also more likely to be married. We would like to rule out that simple explanation for our story. In order to do so, we look at predictors of marital status that allow us to identify the effect of the changing marital status rather than a personal inherent trait.
[To do that, we looked at] the variation and the laws governing divorce across the states in the U.S. The idea is that divorce laws shape the incentives to get married, especially for wealthy individuals. In particular, in the community property states, it is much costlier for a wealthy individual to be divorced. Therefore, it is potentially costlier for them to get married in the first place. And all else being equal, that will shape the decision of whether to get married or not for a particular person.
What we find is that in community property states, where indeed the CEOs are more likely to be single, as this logic predicts, CEOs are also … more willing to invest in the firm and take greater risks, suggesting that the evidence that we find is not about the two different types of people but more about how these marital incentives are driving individual risk taking decisions.
Knowledge at Wharton: What will you look at next? What do you think is a follow-up to this research?
Roussanov: Well, one interesting direction that I sort of alluded to earlier is to see how marital status affects the risk-taking decisions of money managers — hedge fund managers, mutual fund managers, individuals who make risk-taking decisions on a daily basis [and are] potentially even more responsive to risk and risk and return trade off. That’s something that is definitely in our agenda going forward.