Abstract

Empirical evidence has found a consistent association between younger CEOs and a higher level of risk in their corporate policies. This is inconsistent with career concerns theory, which suggests younger CEO does not want to damage their future career prospect with failed risky decisions. Empirical evidence suggests that Duration (of compensation contract) along with overconfidence and tenure do not cause the negative relation between CEO Age and risk tolerance (which is measured by stock returns volatility and R&D intensity). On the contrary, I find older CEOs (more than 50 years old) respond negatively and significantly to increases in Duration when younger CEOs do not. More broadly, longer-duration compensation contracts make CEOs more hesitant to take risks and this type of contracts are given significantly more to younger CEOs. This suggests boards of directors may be giving CEOs suitable compensation contracts to control the risk tolerance of these managers. In addition, there is no difference in the magnitude of the impact of Duration on riskiness measures in first time CEO compared to CEOs who held the position before. Similarly, there is no evidence that suggests Duration has an impact on measures of M&A activities.