To study the relationship between CEO personal risk taking and a variety of
corporate policies, the authors use CEO possession of a private pilot license as
a proxy for personal risk taking. They find that firms led by pilot CEOs are
associated with higher equity return volatility, which the authors trace to such
specific corporate policies as leverage and acquisition activity undertaken by
The authors study the relationship among CEO personal risk taking, corporate risk
taking, and total firm risk. As a proxy for personal risk taking, they use CEO
possession of a private pilot license, which gives the authors an observable measure
of risk taking that is unrelated to firm activities. Their results demonstrate that
CEO tolerance for risk in nonpecuniary contexts has explanatory power for corporate
project selection and overall firm risk.
How Is This Research Useful to Practitioners?
The authors’ results could be relevant to practitioners in several ways. First,
the authors find that firms led by pilot CEOs have higher return volatility, which
they say can be explained by these firms’ higher acquisition activity. This
result is inconsistent with prior research that suggests that pursuing acquisitions
is a means to reduce risk.
Second, the results suggest that the acquisition activity of pilot CEOs leads to
significant positive value creation, which indicates that pilot CEOs mitigate agency
costs. Prior research on agency costs has shown that shareholders bear the cost when
risk-averse managers forgo risky projects with positive net present value.
Third, the authors find that pilot CEOs are associated with compensation structures
that are more likely to have high performance-based pay. The option-like payoff of
such types of compensation contracts benefits from a greater sensitivity to the
level of equity volatility.
How Did the Authors Conduct This Research?
The authors find CEOs with pilot licenses by identifying an initial sample of 4,012
CEO–firm combinations from the Compustat ExecuComp database for CEOs who took
office on or after 1 January 1991. They match those CEO names against those in the
Federal Aviation Administration (FAA) Airmen Certification database. Names that
match are further matched using personal information on the CEOs from public records
to validate the FAA certificate information. The result is a final sample of 179
pilot CEOs (1,016 firm-years) and 2,931 nonpilot CEOs (14,611 firm-years).
Next, the authors perform a series of regressions and use an indicator variable that
equals 1 if the CEO has had at least one certificate in FAA records and 0 otherwise.
All the specifications contain independent variables that proxy for CEO
characteristics and firm characteristics. Many of the specifications use firm,
industry, geographical, and year fixed effects, and the results are robust to these
specifications. In addition, the authors test the robustness after adding controls
for such other managerial characteristics as overconfidence, upbringing during the
Great Depression, military experience, tenure, and age. They find no significant
differences when including these additional control variables.
The authors acknowledge that flying airplanes is relatively rare. As such, their
results depend on how well pilot licenses serve as a proxy for personal risk taking.
Moreover, measuring an individual’s appetite for risk is challenging, and it
is an issue that arises in other areas of finance as well. Notably, this issue is
central to investment management because the individual’s degree of risk
aversion is a critical input in determining the appropriate investment policy to