Abstract
In this paper, we explore relationships between CEO facial width, a proxy for testosterone levels during adolescence, and financial management decisions. Using methodology from prior research, we collect a sample of 968 S&P 500 CEO profiles and analyze them to determine the facial width-to-height ratio (fWHR). We expect that greater CEO facial width will be associated with riskier, more aggressive financial policies. We find that higher CEO facial width-to-height ratio (fWHR) is associated with more aggressive financial management decisions. Specifically, we find a positive relationship between CEO fWHR and firm leverage and a negative relationship between CEO fWHR and firm cash holdings. These relationships are also observed among subsamples where CEOs are likely to wield substantial influence over financial management policies, such as long-tenured CEOs. We do not find evidence that CEO selection process explains the observed relationship between fWHR and financial policies. Thus, it appears that the relationships documented between CEO fWHR and firm financial policies are likely consistent with managerial preference and that high testosterone levels may induce CEOs to pursue aggressive financial policies. We show that high-fWHR CEOs tend to own a smaller fraction of their firms. This suggests an increased priority for more masculine CEOs on pursuing their own best interests (diversification in their personal portfolios) ahead of signaling alignment with shareholders, while the reverse is true for CEOs with lower fWHRs. The results are robust to the inclusion of industry and year fixed effects and firm-year controls. This paper adds to the literature that shows individual differences in CEOs, in this case, CEO masculinity, can predict differences in the financial managerial characteristics of firms and financial policies.
Highlights
A growing body of literature indicates that certain observable CEO characteristics, including age1, education2, gender3, overconfidence4, military service5, and early-life experiences6, can have substantial impacts on corporate finance policies
We explore relationships between CEO facial width, a proxy for testosterone levels during adolescence, and financial management decisions
We find that higher CEO facial width-to-height ratio is associated with more aggressive financial management decisions
Summary
A growing body of literature indicates that certain observable CEO characteristics, including age[1], education[2], gender[3], overconfidence[4], military. To examine whether the relationship between CEO fWHR and financial policies reflects managerial preferences, we construct two subsamples where CEOs might have greater influence on the financial policies of their firms. These long-tenured CEOs are likely to be more influential figures in their firms than shorter-tenured CEOs, and the financial policies of their firms should more strongly reflect their managerial preferences In both of these subsamples, the relationships between CEO fWHR and financial policies are consistent with what is observed in the full sample. This paper contributes to the area of corporate finance literature, which shows that observable CEO characteristics can have a significant influence on financial management decisions These findings provide further support for the broader notion that higher testosterone levels are associated with greater risk-taking behavior, even in large publicly traded firms.
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