Lawyer CEOs and corporate risk-taking
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School of Business |
Master's thesis
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Authors
Date
2018
Department
Major/Subject
Mcode
Degree programme
Finance
Language
en
Pages
72 + 4
Series
Abstract
The purpose of this thesis is to study how lawyer CEOs affect corporate risk-taking. Chief executives with a law degree comprise 9% of S&P 1500 CEOs but have not received wide attention in the growing CEO-focused corporate finance literature. Lawyers are generally perceived as risk-averse due to their education and previous career that typically focuses on understanding, controlling and mitigating risks. The goal of this thesis is to empirically assess whether this potential risk-aversion affects corporate policies. I use OLS regressions to estimate the dependency between lawyer CEOs and investment, capital structure and acquisition variables, and find that lawyer CEOs associate with lower capital expenditure, lower R&D investments, higher leverage and lower cash-to-assets ratios. I find no effect for acquisition likelihood or volume but show that lawyer CEOs have a significant positive effect on cumulative abnormal stock returns surrounding acquisition announcements. The positive returns are not explained by acquisition characteristics or a higher completion rate and are robust to different sub-samples and time intervals. Finally, I do not find empirical support for risk-aversion in stock option holding behavior of lawyer CEOs. The empirical results suggest differences in corporate policies for companies with lawyer CEOs compared to the baseline, but general lawyer CEO risk-aversion is not established. Rather it appears that lawyer CEOs are averse towards certain policies such as capital expenditures and R&D investment, which have been shown to increase the company’s litigation risk, while being less risk-averse towards other corporate policies such as the capital structure of the company. The most significant finding of my thesis is documenting 1.4 percentage points higher cumulative announcement day returns in the three-day period [-1, +1] surrounding the announcement of a large acquisition. Based on previous research, I formulate three potential explanations for the result. Lawyer CEOs may be more effective in managing investor expectations which would decrease the negative surprise typically related to acquisitions. They may also be more talented in navigating the legal complexity of acquisitions and mitigating their litigation risk. Finally, lawyer CEOs may announce better acquisitions due to better negotiation outcomes or improved target selection. My thesis has significant contribution to finance literature and increases our understanding of CEOs, specifically lawyer CEOs, and their effect on firm policies. Further academic extensions of the thesis include studying lawyer CEOs in takeover target companies to better understand the causal effects of observed higher announcement returns. Studies could also be extended to other traditional areas of finance research such as innovativeness, IPO underpricing or stock returns. Finally, my thesis also provides practical implications to for example boards making CEO hiring decisions, investors reacting to CEO appointments and acquisition announcements, and lawyer CEOs themselves in understanding potential biases affecting their own decision making.Description
Thesis advisor
Kaustia, MarkkuKeywords
CEO behaviour, lawyer CEOs, corporate policies, mergers and acquisitions