Unmarried executives tend to advocate more aggressive investments in corporate capital expenditures, innovation activity, research and development, and acquisitions, resulting in significantly higher stock return volatility, according to Wharton’s Nikolai Roussanov and Pavel G. Savor of Temple University.
Marital status is a changeable characteristic rather than a personal inherent trait, previously considered as unrelated to risk-taking decisions.
However, Roussanov and Savor found that marital status can both reflect and affect individual risk preferences based on their analysis of financial risk-taking decisions of CEOs of the U.S.’s 1,500 largest public companies and variations in divorce laws across U.S. states.
Although unmarried CEOs tend lead smaller, early-stage, high-growth firms that benefit from greater investing, Roussanov and Savor controlled for various differences between firms and found that unmarried CEOs make about 10% more risky investments than married CEOs.
Managers are “rational maximizers,” and the target of maximization can change based on personal circumstances, they concluded.
Unmarried men are more aggressive and willing to take risks, due to higher testosterone levels, according to Chapman University’s Terence Burnham, with colleagues Judith Flynn Chapman and Peter Ellison of Harvard, University of Nevada’s Peter Gray, Matthew McIntyre of 23and Me, and University of Rochester’s Susan Lipson.
In addition, they note that married men may become more cautious as responsibilities for family members increase and testosterone levels decrease.
CEOs, they found, are more likely to be unmarried in U.S. community property states because it is much costlier for a wealthy individual to be divorced.
As a result, it may be potentially costlier to marry, given the significant chance of divorce.
“A person’s individual characteristics and … individual life cycle matter for the decisions that they make…on behalf of the firms that they lead… Managerial decisions are affected by what is happening in those individual’s personal lives.,” said Roussanov.
Boards of Directors may consider a leader’s or candidate’s personal situation, although in the U.S., this is not a legitimate selection criterion.
However, Boards may design CEO incentive compensation tailored to the executive’s risk tolerance, informed by marital status.
For example, a married male or a female CEO leading a fast-growing firm may need financial incentives to increase risk tolerance, since both groups tend to have lower average testosterone levels and lower risk appetite than unmarried men, according to researchers including Northwestern’ s Paola Sapienza, with Luigi Zingales and Dario Maestripieri of University of Chicago
Likewise, a younger unmarried male or CEO of a less dynamic business may need compensation that rewards slower but consistent long term growth.
-*To what extent have you seen organizational leader’s changeable characteristics affect business performance?
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