CEO Reputation and Corporate Risk-Taking: Managerial Competence or Managerial Defence?

Yizao Chen and Shihua Huang

Emerging Markets Finance and Trade, 2023, vol. 59, issue 14, 4028-4053

Abstract: This study uses China’s A-share listed companies as a research sample to empirically examine the impact of CEO reputation on corporate risk-taking. Our study finds that CEO reputation is positively associated with corporate risk-taking; that is, it supports the managerial competence hypothesis. Furthermore, the concrete path of CEO reputation affecting enterprise risk-taking is shown by the fact that enterprises with a higher CEO reputation reflect higher degrees of innovation (including innovation investment and output), frequency of mergers and acquisitions, capital expenditures, and excessive debt. Heterogeneity analysis shows that the effect of CEO reputation on corporate risk-taking is present only in firms with a higher degree of CEO reputation and a lower level of external governance, and there are no statistically significant differences in the above effects across the nature of property rights. We also find that CEOs with better reputations have higher compensation levels and lower board dissent, which is also consistent with the managerial competence hypothesis. An analysis of the economic consequences shows that a CEO’s reputation can ultimately increase firm value by promoting corporate risk-taking. In addition, the effect of CEO reputation on firm risk reverses to a negative relationship when the CEO is older and has a longer tenure, thereby exhibiting the managerial defense characteristics of reputation.

Date: 2023
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DOI: 10.1080/1540496X.2022.2164691

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