Managerial Attitudes and Corporate Actions

TL;DR: The authors found that U.S. CEOs are significantly more optimistic and risk-tolerant than the rest of the population, and that their behavioral traits such as optimism and managerial risk-aversion are related to corporate financial policies.

Abstract: We administer psychometric tests to senior executives to obtain evidence on their underlying psychological traits and attitudes. We find U.S. CEOs differ significantly from non-U.S. CEOs in terms of their underlying attitudes. In addition, we find that CEOs are significantly more optimistic and risk-tolerant than the lay population. We provide evidence that CEO’s behavioral traits such as optimism and managerial risk-aversion are related to corporate financial policies. Further, we provide new empirical evidence that CEO traits such as risk aversion and time preference are related to their compensation.

Summary

1. Introduction

• The authors also examine how managerial attributes such as risk aversion and time preference relate to compensation at the firm level.
• It is also possible that the respondents are not representative of the underlying population, an issue that the authors investigate below.
• Second, the authors contribute to the literature that investigates whether executives’ characteristics and psychological traits are related to corporate decisions.

2.1. Survey mechanism

• A common approach used in prior work is to infer executive attitudes from observed executive actions.
• While this is a laudable technique, questions arise about the validity of the action as a broad-based proxy, and samples are limited to companies for which such managerial actions are observable.
• The authors adopt a different approach in which they gauge managers’ personality traits and attitudes using well-established questions that have been shown in psychology and economics to be valid measures of peoples’ attitudes.
• To gauge sure loss aversion, the authors present managers with a gamble that, if rejected, indicates that they are averse to sure losses.
• In addition, because the survey is anonymous the authors also gather information on other measures and variables thought to be important, as described below.

2.2. Survey Design

• The authors survey is wide ranging, their hope being to capture many facets of corporate decision making.
• The authors survey was designed to address multiple issues, including how attitudes of senior management relate to firm level policies.
• Below the authors focus on the key variables that they use in this study and how they are created.
• In a companion paper (Graham et al., 2010) ,the authors examine how capital is allocated, and decision-making authority is delegated, within firms, and use several questions from the survey that are not studied in this paper.

2.2.1. Measuring attitudes

• The authors follow the approach in Barsky et al., 1997, to measure personal risk aversion.
• (d) 50% chance that the job pays twice your current incomes for life and 50% chance that the job pays 4/5 of your current income for life.
• In their analysis, the authors classify people who answer (a) and (c) as being the least risk-tolerant.
• The authors classify as optimistic respondents who average 3 or higher for these questions.
• There is a 20% chance that the project will generate a $10 million US cash flow in a year’s time and nothing thereafter.

2.2.2. Demographics/career related variables

• This is an anonymous survey, hence the authors gather information on the personal characteristics of the executives, their past career/education, and related demographics since past work suggest they can be important, and they therefore incorporate them as controls.
• Case and Paxson (2008) suggest that height might proxy for cognitive ability.
• An MBA degree can signal many things, also known as MBA.
• The authors follow Chevalier and Ellison (1999) methodology, which briefly, is as follows.
• If the middle 50% is not available the authors take the average SAT scores or ACT scores at the university.

2.2.3. Company characteristics

• The authors are unable to match to Compustat data since the survey does not require companies to identify themselves; hence they collect company specific data in the survey itself.
• One consideration important to their analysis is that using more debt “levers up” the firm, producing more risk and higher expected returns, a preference which might be related to executive personality traits.
• Accordingly, one of their objectives is to investigate whether managerial characteristics are related to acquisition activity.

2.3. Survey Delivery

• The authors created an initial survey instrument based on existing theoretical and empirical research.
• The authors then solicited feedback from a number of academics, practitioners, and CEOs on the initial version of the survey.
• Due to their small number, the authors do not separate out these CEOs for the remainder of the paper but instead merge them in with the other Chief Executive respondents.
• The second group of CEOs the authors contacted is 800 (net of bounced emails) chief executive readers of CFO magazine.
• The referenced quarterly CFO survey can be found at http://www.cfosurvey.org.

2.4. Summary statistics

• Table 1, panel A contains self-reported summary information about the characteristics of sample firms.
• While much research studies public firms, one advantage of their sample is that the authors learn a great deal about private firms.
• The authors gather a number of demographic characteristics of the CEOs relating to personality traits as well as career and education.
• The authors discuss the differences further in Section 3 below.
• In terms of career path, 16% of the sample comes from a finance/accounting background.

3.1. Comparisons between U.S. CEOs, U.S. CFOs, and non-U.S. executives

• For risk aversion, the authors have a benchmark from the Barsky et al. (1997) study.
• The authors results suggest that 9.8% of CEOs have a relative risk aversion greater than 3.76 as compared to 64% of similar aged lay population.
• Not only are CEOs more optimistic as per psychometric tests, they are also perceived to be more optimistic by their CFO colleagues.
• Panel B of Table III, column (2) shows that the results are similar when matching by public versus private status.
• The authors find similar to the difference in attitudes between U.S. CEOs and non-U.S. CEOs U.S. CFOs are less risk averse, more optimistic, and more patient than their non-U.S. counterparts.

3.2. Firm characteristics

• The summary statistics indicate that the median firm has two operating segments and has experienced median historical sales growth of 12%.
• As might be expected, older CEOs tend to work in larger firms, the prestige of the college from which they graduate matters less, and they are more likely to be male.
• Breaking down their data, the authors observe that CEOs of private firms obtain, on average, 58.8% of their compensation from salary, as compared to 44.6% received by CEOs of public firms.
• This is not surprising given that 88.5% of their sample is comprised of private firms, while Compustat only contains public firms.
• The authors find that the average self-reported debt/asset ratio for publicly listed firms was 24.4% with a standard deviation of 22.8.

3.3. Are CEO traits related to corporate decisions?

• The authors now study the traits of managers and whether they relate to corporate actions.
• The results suggest that if a firm has a highly optimistic CEOs it is likely to have more debt, in particular more short-term debt; the increased marginal impact of a very optimistic CEO on short term debt ratio is 3.6%.
• More risk tolerant CEOs are more likely to make acquisitions.
• The authors find similar results in the OLS regression.
• Overall, their results suggest that capital structure actions, both total debt and debt maturity, as well as acquisition activity are associated with CEO traits and the kind of career experience that managers have had in the past.

3.4. CEO traits and firm growth

• Caution needs to be exercised when interpreting the results in Section 3.3 because of potential reverse causality.
• More broadly, however, other studies have found that optimism, in particular, is a trait that persists across time within individuals.
• Once again, the authors find that risk tolerant CEOs are more likely to be in growth firms.
• These results are consistent with some selfselection or matching occurring between certain kinds of CEOs and certain kinds of companies.

3.5. CEO traits and compensation

• The authors next examine policies which impact the CEOs directly by affecting their wealth, in particular compensation.
• Table VI, panel B, columns 2 and 3 present the regression results.
• The results suggest that risk-tolerant CEOs are more likely to receive proportionately larger remuneration via stock/bonus/options and less via salary.
• Further, while the authors find CEOs are generally more optimistic, within the sample they have a lot of cross-sectional variation in corporate policies and behavioral characteristics of CEOs which they exploit in their tests.
• This does not alter their results for the behavioral variables, in particular, for optimism and riskaversion are robust.

4. Conclusions

• The authors examine how U.S. CEOs differ from the lay population, CFOs, and non-U.S. chief executives.
• The authors assemble a unique database on sitting business executives in which they assess managers’ personality traits and attitudes using well established methods that have been validated in psychology and experimental economics as providing a good gauge of peoples’ attitudes.
• Interestingly, U.S. based CEOs also differ in significant ways from their non-U.S. counterparts, both in terms of career paths and attitudes, tending to be more optimistic and less risk-averse, among other things.
• This result is consistent with the theoretical work from standard agency theory but direct evidence on this has been scarce.
• The authors results provide new evidence of a role for specific behavioral traits, in particular risk-aversion and time-preference in the determination of compensation structure.

Figures

TABLE III: COMPARISONS OF EXECUTIVE CHARACTERISTICS ACROSS SAMPLES. This table reports the summary statistics of specific personal characteritics of participating executives used in the analysisPanel A - C compares the characteristics of US CEOs against those of U.S. CFOs, U.S. CEOs with Non-U.S. CEOs and U.S. CFOs with Non-US CFOs respectively based on three sampling methods. The first, unconditional, uses the entire sample. The second sampling method matches firms one-on-one based on public/private status, randomly sampling when the number of observations are uneven. The third sample method matches firms one-on-one based on size categories. Panel A compares U.S. CEOs to U.S. CFOs using the 3 sampling methods described above, while Panel B compares the characteristics of US CEOs against those of non-US CEOs in the same way. Panel C compares the characteristics of U.S. CFOs against those of non-U.S. CFOs for the three sampling methods. Variables are defined as in Table II. Summary statistics reflects means where applicable. Significance at the 10% level is denoted by *, 5% by **, and 1% by ***. Number of observations are included in the panel header.

TABLE II PERSONAL CHARACTERISTICS OF CORPORATE EXECUTIVES. Panel A reports the summary statistics of personal characteristics of U.S. CEOs. Highly risk averse is a dummy variable for executives that prefer a job that pays with certainty their current salary against jobs that pay twice their current income with 50% chance and 80% of their current income with 50% chance. MBA degree is a dummy variable for executives with MBA degrees. Very optimistic is a dummy variable for an executive that has reported an average of 4 or higher in the LOT-R Test. Averse to sure losses is a dummy for executives who avoids sure losses now by hedging. Focused in Fin. & Acc. is a dummy for executives who have experience focused in financial and/or accounting fields. Tenure is the number of years the executive has been in current position. Impatient is a dummy variable for executives who prefer money now over money a year later at an interest of 30%. Stock

TABLE I FIRM CHARACTERISTICS SUMMARY STATISTICS. This table reports the summary statistics of specific firm characteristics used in the analysis. All variables reflect the survey responses of participating U.S. CEOs. Firm sales (size) is determined based a survey question categorizing firm sales into seven size groups. Category midpoints are used to create the firm size variable reported here. Category 1 includes firms with sales less than $25M, category 2 includes firms with sales between $25M and $99M, category 3 includes firms with sales between $100M and $499M, category 4 includes firms with sales between $500M and $999M, category 5 includes firms with sales between $1B and $4.9B, category 6 includes firms with sales between $5B and $9.9B, and category 7 includes firms with $10B or above in sales. Historical and expected growth reflect growth in sales. Number of operating segments refer to the number of segments in which the reporting executive has experience in prior to current position. Number of acquisitions reflects the number of acquisitions the firm has made over the past two years. Executive compensation variables (stocks, options, bonuses, and salary) are percentages of total compensation. Panel A: All Firms

Full text

Managerial Attitudes and Corporate Actions
John R. Graham, Campbell R. Harvey, and Manju Puri
*
Fuqua School of Business, Duke University, Durham, NC 27708, USA
National Bureau of Economic Research, Cambridge, MA 02912, USA
July 2012
ABSTRACT
We administer psychometric tests to senior executives to obtain evidence on their underlying psychological traits
and attitudes. We find U.S. CEOs differ significantly from non-U.S. CEOs in terms of their underlying attitudes. In
addition, we find that CEOs are significantly more optimistic and risk-tolerant than the lay population. We provide
evidence that CEO’s behavioral traits such as optimism and managerial risk-aversion are related to corporate
financial policies. Further, we provide new empirical evidence that CEO traits such as risk aversion and time
preference are related to their compensation.
JEL Classification: G30, G32, G34
Keywords: Managers, attitudes, personality traits, risk aversion, capital structure, debt, acquisitions, corporate
policies, behavioral corporate finance
________________________________________________________________________
*Corresponding author, Tel: +1 919.660.7657, Fax: +1 919.660.8030, E-mail: mpuri@duke.edu. We
appreciate the comments of Zahi Ben-David, Jack Bovender, Alon Brav, Murillo Campello, Steve Dimmock, Don
Durfee, Simon Gervais, Dirk Hackbarth, Bill Holstein, Janet Kersnar, Ahmed Khwaja, Hong Liu, Mary Frances
Luce, Pete Nicholas, David Robinson, Antoinette Schoar, Hersh Sheffrin, Meir Statman, Jack Soll, Morton
Sorenson, Will Mitchell, David Walonick, Ivo Welch, and seminar participants at ASSA meetings, San Francisco,
Case Western University, Duke University, Federal Reserve Bank of Kansas City, Norwegian School of Economics
and Business Administration, Bergen, and the 2008 Western Finance Association meetings for helpful comments.
We thank Andy Clifton, Kees Koedijk, Peter Roosenboom, Susan Simko and Cheri Varnadoe for their help in
implementing the survey, and Chief Executive magazine, CFO magazine, CFO Asia, and CFO Europe for allowing
us to survey their subscribers. Special thanks to Martine Cools, Abe de Jong, Frank Ecker, Nadja Guenster, and
Bruno Laranjeira for translating the survey. We appreciate the research assistance of Benjamin Ee, Hai Huang,
Nikhil Sharma, and Jie Yang. All errors are our own.

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1. Introduction
What causes firms to behave the way they do? The answers to this important question are
not well understood. Traditional economic theory suggests companies should simply pursue
positive net present value projects to maximize shareholder wealth. However, firms around the
globe seem to behave differently, leading some to speculate that heterogeneous objective
functions are being maximized (see e.g., Allen, 2005). Even within the U.S., firms in the same
industry, of similar size and facing similar investment opportunities behave differently.
To what extent do personality characteristics vary among U.S. managers and non-U.S.
firms? What is the importance of individual heterogeneity in corporations? The idea that
individual heterogeneity matters in corporate finance/governance has recently become a primary
focus in behavioral finance. Recent papers suggest that managers matter – there are findings on
managerial fixed effects (Bertrand and Schoar, 2003), on managerial overconfidence proxies
relating to firm behavior (Malmendier and Tate, 2005, 2008); and on Chief Executive Officer
(CEO) characteristics in private equity firms being related to outcome success (Kaplan,
Klebanov, and Sorensen, 2010).
We use a survey-based approach to provide new insight into the people and processes
behind corporate decisions. This method allows us to address issues that traditional empirical
work based on large archival data sources cannot. For example, we are able to administer
psychometric personality tests, gauge risk aversion, and measure other behavioral phenomena.
Our mode of inquiry is similar to those of experimental economists (who often administer
gambling experiments) and psychologists (who administer psychometric tests). As far as we are
aware, no other study attempts to measure attitudes of senior management directly through

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personality tests to distinguish CEOs from others and U.S top level executives from non-U.S. top
level executives. We also relate CEO attributes to firm level policies.
Our survey quantifies behavioral traits of senior executives and also harvests information
related to career paths, education, and demographics. We ask these same questions of chief
executives and chief financial officers, among public and private firms, and in both the U.S. and
overseas. We can thus compare traits and attitudes for U.S. and non-U.S. CEOs to see if there is
indeed a significant difference in attitudes. We also ask questions related to standard corporate
finance decisions such as leverage policy, debt maturity, and acquisition activity. This allows us
to relate attitudes and managerial attributes to corporate actions. We also examine how
managerial attributes such as risk aversion and time preference relate to compensation at the firm
level.
We use the survey responses to address the following broad questions. How do U.S. CEOs
differ from lay people, and also how do they differ from Chief Financial Officers (CFOs) and
non-U.S. CEOs in terms of behavioral and other characteristics? Are managerial psychological
traits, career experiences, or education correlated with corporate decision-making? Do
behavioral traits such as risk aversion and time preference explain compensation packages (e.g.,
does risk aversion actually decrease pay-performance sensitivity as predicted by theory)?
We compare CEOs to CFOs and others in terms of personality traits and career
characteristics, as well as make attitude comparisons of CEOs to established norms in the
psychology literature. We find that CEOs are much more risk-tolerant than the lay population of
similar age profile (studied in Barskey et al., 1997). It is notable that CEOs are also much more
optimistic than the lay population as compared to the norms in the psychology literature (Scheier

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et al., 1994). We find, as might be expected, that CEOs and CFOs have different personal
characteristics and career paths. Interestingly, we also find significant differences between CEOs
and CFOs in terms of attitudes. In particular, our psychometric tests suggest that CEOs are much
more optimistic than CFOs. Our results also suggest that U.S.-based CEOs and CFOs are more
optimistic than their non-U.S. counterparts. This provides evidence on one channel through
which U.S. and non-U.S. firms differ: their executives differ in terms of attitudes and traits,
perhaps a reflection of firms outside the U.S. having different norms or maximizing different
objective functions (Allen, 2005).
Our paper focuses on CEOs because they are the principal corporate decision makers. In
particular, we focus on two key areas that CEOs feel they have the most influence on: mergers
and acquisitions and capital structure (see Graham et al., 2012). We investigate which factors
and experiences (e.g., personality traits or career path) of the decision maker (CEO) affect capital
structure and acquisition decisions. We show that these corporate policies are significantly
related to the personality traits of executives. For example, we find that companies initiate more
mergers and acquisitions when their chief executive is more risk tolerant. Beyond risk tolerance,
one might expect that the level of a chief executive’s optimism might be related to the corporate
decisions her company makes. For example, optimistic CEOs might expect that recent
profitability will continue into the future, or that the future will be better than the recent past.
Consistent with this view and the arguments of Landier and Thesmar (2009), we find evidence
that optimistic CEOs use more short-term debt than do firms led by less optimistic CEOs. There
is also a growing literature that suggests that males tend to be more overconfident than females
(see e.g., Barber and Odean, 2001). Correspondingly, we find that male CEOs are more likely to

Frequently asked questions

Q1. What contributions have the authors mentioned in the paper "Managerial attitudes and corporate actions" ?

The authors provide evidence that CEO ’ s behavioral traits such as optimism and managerial risk-aversion are related to corporate financial policies. Further, the authors provide new empirical evidence that CEO traits such as risk aversion and time preference are related to their compensation. 

Q2. What is the mode of inquiry of the psychologists?

Their mode of inquiry is similar to those of experimental economists (who often administer gambling experiments) and psychologists (who administer psychometric tests). 

Q3. What is the reason for the height-wage disparity?

One explanation given for this disparity is that height, especially in the adolescent years, is important in developing confidence, which ultimately translates into the wage disparity. 

Q4. What is the definition of aversion to sure losses?

Aversion to Sure LossesIf an executive is averse to sure losses then this may lead her/him to undertake actionssuch as “throwing good money after bad” in hopes of turning around what appears to be a sure loss. 

Q5. What are the likely factors to affect CEOs?

The authors find that risk averse CEOs are significantly more likely to be compensated by salary and less likely to be compensated with performance related packages. 

Q6. What is the chance that the job pays twice your current income for life?

(f) 50% chance that the job pays twice your current incomes for life and 50% chancethat the job pays 1/2 of your current income for life. 

Q7. What was the format of the survey?

For most of the participants, rather than a fax, the version of the survey they were administered consisted of a series of linked HTML pages. 

Q8. How many CFOs were faxed a survey instrument?

107 financial officers who are alumni of Duke University were faxed a survey instrument (the results do not change if faxed responses are ignored). 

Q9. How many CEOs were invited to participate in the survey?

The referenced quarterly CFO survey can be found at http://www.cfosurvey.org.During the first two weeks of February 2006, the authors also invited four groups of U.S. CFOs toparticipate.