A safe pair of hands? Executives’ legal expertise and firm risk behaviour — a European perspective

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School of Business | Master's thesis
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This thesis studies the relation between lawyer CEOs and various proxies for firm risk behaviour. To the best of our knowledge, the study is novel in its use of a sample made up of European-listed companies. Using OLS regressions, we estimate the relationship between lawyer CEOs and variables related to a firm’s investment policies, liquidity, capital structure, and credit ratings. Lawyers, due to their educational background and prior careers, which place a strong emphasis on comprehending, managing, and limiting risks, are typically thought of as exhibiting less risky behaviour. The purpose of this thesis is to determine empirically whether this perceived risk aversion is associated with corporate policies, and whether it is recognized by third party credit assessments. In our analysis, we sample European-listed firms which are part of the STOXX 600 index, between the years 1998 and 2022. Our most significant finding is that we document firms led by lawyer CEOs to associate with 0.89 rating increments higher credit ratings. Additionally, we document firms led by lawyer CEOs to associate with lower liquidity measured by a firm’s cash-to-assets ratio. Further analysis shows our credit rating-related results to be time dependent, and stronger following the Global Financial Crisis. Additionally, we find results for both credit ratings and liquidity to be confined to less risky firms. We contribute to existing literature by enhancing the cumulative understanding regarding specific CEO characteristics and their association with certain firm behaviour, specifically lawyer CEOs’ association with types of risk behaviour. Future research can further explore the avenues by which lawyer CEOs attract better credit ratings to uncover underlying causal links. The wider topic can further be explored by extending the lawyer CEO lens to other traditional areas of finance such as stock returns, stock volatility, IPO underpricing, or corporate governance topics. Our findings have practical implications for boards hiring CEOs, investors responding to CEO appointments and to CEOs themselves in aiding awareness regarding potential biases impacting their decision-making
Thesis advisor
Keloharju, Matti
juristitoimitusjohtaja, riskikäyttäytyminen, riskiaversio, luottoluokitus, Eurooppa
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