Study: CEOs Are More Optimistic, More Open To Risk

November 5, 2012
Finance, Management

Findings from professors Campbell Harvey, Manju Puri, and John Graham

DURHAM, N.C. -- Chief executive officers in the U.S. have a more optimistic outlook on their businesses and, more broadly, on life than the general population. In addition, CEOs are more willing to take risks, a trait that influences companies' financial policies and decisions.

These are among the findings of researchers from Duke University's Fuqua School of Business who are the first to ever conduct comprehensive personality tests to CEOs and chief financial officers of public and private firms based in the U.S., Europe and Asia. According to the 3,000 personality test responses, 80 percent of U.S chief executives are "very optimistic" people, compared with 65 percent of chief financial officers. The results are included in an article titled "Managerial Attitudes and Corporate Actions," which will be published in the Journal of Financial Economics.

"Our research is the first to administer psychometric personality tests to CEOs and CFOs. The executives are a vastly different breed than the average person. There is also considerable variation among CEOs," said Campbell Harvey, professor of international business at Fuqua.

"CEOs are much more optimistic than others, including CFOs," said Manju Puri, professor of finance at Fuqua. "Meanwhile, only five percent of chief financial officers consider themselves more optimistic than the CEO of their company. Finance executives go so far as to say that their CEOs are more optimistic about almost everything in life, even beyond their outlook on business prospects."

Psychological characteristics of chief executives, such as risk aversion and optimism, are closely linked to corporate policies. Companies seem to attract CEOs who reflect the company's "personality."

"Corporate policies are significantly related to the personality of executives," said John Graham, professor of finance at Fuqua. "For example, optimistic CEOs use more short-term debt than other firms because they are optimistic about future financing needs. Companies initiate more mergers and acquisitions when the chief executive is more risk tolerant, meaning that they are more content to 'roll the dice'."

Executive pay structure is also affected by leaders' personality traits. Risk-taking CEOs are much more likely to be paid with proportionately more stock, options and bonuses and less likely to be paid with a salary. In addition, CEOs who are impatient earn proportionately more in salaries rather than stock options and bonuses as compared to patient CEOs.

"Our results on risk aversion and incentive pay are striking," said Puri.  "In general it costs a company more to compensate a risk-averse CEO with incentive plans because the firm needs to encourage its executive to take on valuable investment projects that happen to have more risk.  Our results suggest that firms match CEO personality traits and risk aversion to the compensation package in a way that reduces the cost of incentive compensation."

The research report is available online.

This story may not be republished without permission from Duke University's Fuqua School of Business. Please contact for additional information.

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