CEO risk preference and financial and operating leverage in the context of firm lifecycle
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This study investigates the influence of CEO risk preferences on firms' financial and operating leverage within the framework of the company life cycle, since these preferences can impact the riskiness of corporate policies.We evaluate our predictions using a dynamic panel data model employing Tobit and logistic regression, sourcing our data from U.S. public firms acquired from the Compustat and ExecuComp databases. In accordance with our expectations, we observe that in the mature stage, a firm is unlikely to exhibit low operating and financial leverage. However, if the firm is managed by a CEO with a high tolerance for risk, it will likely have elevated operating and financial leverage, signifying increased operational and financial risk. Our findings indicate that companies adopt varying leverage policies at distinct life cycle stages, with CEO risk preference serving as a moderating element influencing the firm's leverage policy decisions. This study will examine the relationship between CEO risk preference and both operational and financial risk while also enhancing the literature by elucidating the dynamic adjustments of leverage structures and the moderating influence of CEO risk preferences, thereby offering valuable guidance for managers in strategic financial planning. Additionally, in contrast to Chen, Harford, and Kamara (2019), our empirical investigation encompasses all enterprises, rather than solely those with positive earnings.
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