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in finance we're very interested in
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understanding the role that risk and
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attitudes to risk
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play in determining investment
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investment behavior which is obviously
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very important for
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long-run economic growth my co-author
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pavel savor and i were particularly
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interested in understanding the role
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that
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marital status and changes to marital
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status over an individual's life can
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affect
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important risk-taking decisions
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generally
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marital status is not something that is
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thought of as an important determinant
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of
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economic decisions and risk-taking
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decisions in particular however there
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are reasons
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shaped by both economic and
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psychological forces to think that
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it may indeed be important what we
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wanted to know is is it important for
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decisions that are really large stakes
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uh
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outcomes that uh that are tied to them
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so what we look at is the risk taking
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decisions of ceos
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of public companies in the u.s so we'd
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collected data
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of a marital status of ceos of 1500
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largest public companies and looked at
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the differences
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in behavior of these firms of the firms
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that were led by ceos who were single
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and those who were married
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what we found was that firms led by
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single ceos engaged in much more
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aggressive investment behavior along the
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lines of capital expenditure as well as
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innovation activity research and
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development acquisitions to some extent
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than companies led by ceos who were
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married and these differences translated
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also in greater riskiness of the firms
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led by single ceos as measured by the
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stock return
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volatility
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what was surprising to us was how large
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the magnitudes of these differences were
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what we found was that not accounting
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for
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various differences between the two
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types of firms
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you could see that firms led by single
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ceos invest
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almost 75 percent more as a kind of
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share of their current assets in the
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various
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uh of firm building activities such as
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again capital expenditures or research
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and development
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now part of that difference is
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attributable to the fact that
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the firms that single ceos run tend to
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be smaller younger firms these tend to
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grow
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faster and therefore invest more however
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even
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after accounting for the variety of
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differences in these two types of firms
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that we can observe we find that there
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is a still
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sizable difference about 10 percent
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greater investment by firms led by
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single ceos
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compared to firms run by ceos who are
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married
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and differences in stock return
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volatility are also quite substantial
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well the key practical implication is
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that
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the person's individual characteristics
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and
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person's individual kind of life cycle
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matter for the decisions that they make
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on behalf
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not just of their their families
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themselves
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but also on behalf of the firms that
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that they lead and therefore
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one may need to be aware of the personal
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situation that
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a leader of a company or a manager
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has because that is going to shape the
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risk-taking decisions
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and investment decisions that they're
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going to be facing
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one reason to believe that marital
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status
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shapes risk-taking decisions has to do
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with kind of the economics of marriage
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and
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what this means is that single
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individuals
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they're clearly competing for potential
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mates with other single individuals and
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one of the important
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factors and that competition is kind of
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socio-economic status
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and even at the kind of the
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high end of the wealth distribution
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where most of the ceos are
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how much wealth you have how successful
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you are
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matters potentially for your prospects
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and that potentially could be one of the
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drivers another
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potential driver is of course that
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people who are
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married have a family uh they're more
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risk-averse simply because they have a
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family to provide for and
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they're just more cautious and more
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careful we're not sure if that is kind
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of a
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as important enough of a concern for the
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wealthy individuals that ceos tend to be
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but it's a it's a potential concern
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something that is kind of in between is
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kind of
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psychological almost evolutionary
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biology
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uh shaped uh driver there's evidence in
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fact in evolutionary biology that
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suggests that
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single men in particular uh are
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kind of more aggressive and are willing
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to take more risk and that may be
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related
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to some extent to our kind of status
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story but it could be a kind of a purely
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biological driver that we're we're not
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able
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of course to to to identify
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it's an interesting question how much uh
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boards
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can actually take into account uh the
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manager's kind of personal life
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circumstances
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and hiring or or firing them into some
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extent that
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that is not entirely legal to do so
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however in determining
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the compensation package that the ceo
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will receive in particular
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how much incentive compensation to award
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the ceo for example in the form of
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options clearly
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it matters how risk tolerant or
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risk-averse the ceo
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is and therefore knowing their personal
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situation knowing something about their
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marital status whether they are indeed
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in the search for a spouse or not may
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impact
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how sensitive that compensation package
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that ceo will receive is to the
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performance of the firm and therefore
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how
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much the firm wants to encourage the ceo
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to take more or less risk
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because a married ceo who is leading a
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fast-growing firm may be
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potentially overly cautious and they may
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need to incentivize them with
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particular options to take more risk on
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the other hand you could have a
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a young single ceo of a firm whose
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investment opportunities are not that
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great and the firm that needs to grow in
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a more conservative fashion
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there you may want to scale down the
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kind of the risk appetites of the ceo by
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appropriately shaping their pay package
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i think these results have potentially
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very wide applicability throughout the
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business world we focused on the ceos
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because this is one of the settings
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where the stakes are potentially as
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large as they can get
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and finding an effect there in some
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sense is the most surprising however we
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can think of managers of course
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at lower levels who still make
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risk-taking decisions we can think of
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of course the money management industry
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where risk is
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everything and risk-taking decisions are
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very central in the money management
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industry
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that the trade-off between risk and
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return is the key
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determinant of success and therefore we
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should expect the same type of forces
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acting there as well
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i think there is potentially
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misconception that
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actually economists help perpetuate that
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managers are kind of like autonomous
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automatons and machines that do the
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right thing
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they're rational maximizers of
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something the question is what that
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something
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is of course and what we're adding to
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this picture is that
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managerial decisions are affected by
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what is happening in
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those individuals personal lives in ways
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that
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most of our views of kind of business
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decision making does not account for
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well nobody of course has looked at the
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effect of marital status on the
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decisions of ceos but there's a large
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field of study that tries to understand
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the role of ceo characteristics in
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driving firm outcomes
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what i think is particularly important
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about
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our approach is that we're looking at a
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characteristic that is not
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an inherent personal trait of an
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individual like
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some life experience then they
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obtain early in their life or some
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particular kind of immutable uh
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thing like race or gender uh what
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we are interested in how a in a
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characteristic that is inherently
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changing over time is affecting
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individuals behavior
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now one could say that what we observe
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in the data is that there's some
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individuals who are
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inherently more risk tolerant that they
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also tend to be
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more likely to stay single and then
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there are others who are somehow more
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conservative and they're also more
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likely to be married
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we would like to rule out that simple
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explanation for our story in order to do
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so
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we look at predictors of marital status
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that allow us to identify the effect of
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the changing marital status rather than
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a personal kind of inherent
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trait uh what we what we look at is the
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variation
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and the laws governing divorce across
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the states
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in the u.s and the idea is um
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divorce laws shape the incentives to get
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married especially for wealthy
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individuals in particular
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in community property states it is much
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costlier for a wealthy individual to be
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divorced
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therefore it is potentially costlier for
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them to get married in the first place
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and
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all else equal that will shape the
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decision
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whether to get married or not for a
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particular person
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what we find is that in community
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property states
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where indeed the ceos are more likely to
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be single
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as this logic predicts uh ceos are also
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more risk-taking and more willing to to
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invest in the firm
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and and take greater risks suggesting
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that the evidence that we find is not
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about kind of the two different
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types of people but more about how these
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marital incentives are driving
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individual risk-taking decisions
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well one interesting direction that i
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sort of alluded to earlier is to
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to see how does marital status affect
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risk-taking decisions of money managers
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hedge fund managers mutual fund managers
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individuals who make risk taking
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decisions again on a daily basis
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for potentially even more responsive to
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kind of risk and risk and return
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trade-off and that's something that is
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definitely on our agenda going forward
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you
