The effect of CEO risk appetite on firm volatility: an empirical analysis of financial firms

This paper examines the effect of CEO risk appetite on the return volatility of a sample of large, listed financial firms over the period 2000-2008. After controlling for firm specific characteristics, the results give strong evidence that the CEO risk appetite has an important effect on firm volatility. The biographical measures for CEO risk appetite are significant explanatory variables of all measures of firm volatility employed in this study. The effect of CEO age is significant and positive for all four volatility measures, while CEO education and current job tenure are negative and significant for all four measures. Executive experience with other firm boards has a negative and significant effect on total and idiosyncratic volatility. Interestingly, CEO wealth is complementary to the other biographical variables with a positive effect on all but the default volatility measure. Our results carry implications for shareholders, financial regulators, governments and managers.

Pre-refereed version as permitted by publisher.