Evidence from Finnish and Swedish stock-listed companies and the economic crisis of 1990s

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Journal Title

Journal ISSN

Volume Title

School of Business | Master's thesis

Authors

Date

2019

Department

Rahoituksen laitos

Major/Subject

Mcode

Degree programme

Finance

Language

en

Pages

66+5

Series

Abstract

This thesis examines the effects of having graduated during an economic depression on managerial risk-taking in a Nordic context. In the beginning of 1990s, Finland and Sweden entered deep economic depressions that resulted in numerous bankruptcies and record-high unemployment rates. Recent studies from the US have suggested that CEOs who have graduated during an economic downturn follow more conservative financial policies, depicted by holding less leverage, for instance. The goal of this study is thus to test whether the findings for risk-averseness of graduates of economic downturns hold true also for the Finnish and Swedish economic “depression graduate” CEOs of the 1990s crisis. The study comprises of 532 non-financial firms listed in Nasdaq Helsinki and Stockholm stock markets in years 2010-2018. Out of all the firm-year observations, 20.2% come from firms that have CEOs with economic depression graduation background. I conduct Ordinary Least Squares regressions for a CEO-firm year matched panel data to estimate the relation between “depression graduate” CEOs and variables related to firm financial policies and risk-taking. I additionally apply difference-in-differences method that allows to further analyze manager-related changes in financial policies in respect of CEO transitions. Differences between industries, years and the two countries are controlled in both analyses. Empirical evidence of the study does not support the hypothesis of CEO’s economic downturn graduation experience being linked to more conservative financial policies. In turn, the statistically significant results suggest that “depression graduate” CEOs’ firms follow more aggressive financial policies than the baseline of firms, by having +2.0% higher leverage and holding -1.4% less cash than others. I also find that “depression graduate” CEO firms’ stock returns are -2.9% less volatile per annum, suggesting that while found to be following more aggressive financial policies, “depression graduate” CEOs’ firms seem to be less risky as assets. In terms of leverage, I find evidence of country-level differences in risk-taking, as firms with Swedish depression graduate CEOs are found to have significantly higher leverage than their Finnish peers. I also corroborate previous findings for gender and age differences on risk-taking: in line with prior literature, I find evidence of Finnish and Swedish female CEOs following less risky financial policies, and that an older CEO age is linked to more risk-averse behavior. The findings suggest that different managerial characteristics play roles in firm risk-taking also in the Nordic market context. The results for Nordic markets are however not yet conclusive, hence there remains potential for future research. By examining these markets, we can learn about the differences and similarities Nordic CEOs exhibit in relation to previous US-based studies, and understand the effects these characteristics have on our firms’ policies and performance.

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Thesis advisor

Torstila, Sami

Keywords

CEO behavior, economic depression, financial policies, risk-taking

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Citation

Permanent link to this item

https://urn.fi/URN:NBN:fi:aalto-201907144331

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[gradu] Kauppakorkeakoulu / BIZ