Abstract

To empirically examine the effects of CEOs’ private lives on firms’ performance, I use CEOs’ divorce events as a proxy and collect all CEO divorce cases in the U.S. market from 1980 to 2013. I predict that divorce stress negatively affects CEOs’ ability to make benign strategic decisions, thereby negatively influencing firms’ performance. I find that divorced firms have worse performance than their counterparties before divorce events end and such events motivate CEOs to re-devote themselves to their job post-divorce. The boards of shareholders also use equity-based compensation as a valuable method to incentivize divorced CEOs due to their substantial loss of outside wealth. Furthermore, divorced CEOs reduce their risk tolerance and become more risk averse as they lose wealth and become less diversified in their portfolios.