The Effect of Managers on Systematic Risk

Abstract

Tracking the movement of top managers across firms, we document the importance of manager-specific fixed effects in explaining heterogeneity in firm exposures to systematic risk. In equilibrium, manager fixed effects on systematic risk are positively related with manager fixed effects on stock returns. These differences in systematic risk are partially explained by managers’ corporate strategies, such as their preferences for internal growth and financial conservatism. The early career experiences of managers starting their first job in a recession also contribute to differential loadings on systematic risk. These effects are more pronounced when managers wield more influence, as in smaller firms and firms that do not have an independent board. Overall, our results suggest that managers play an important role in shaping a firm’s systematic risk. This paper was accepted by Victoria Ivashina, finance. Funding: A. Schoar acknowledges financial support from the MIT Sloan School of Management. K. Yeung acknowledges financial support from City University of Hong Kong and the Cornell SC Johnson College of Business. L. Zuo acknowledges financial support from the Cornell SC Johnson College of Business and the University of Toronto Roger Martin Award for Emerging Leaders. Supplemental Material: Data and the online appendix are available at https://doi.org/10.1287/mnsc.2023.4710 .