KU Business faculty experts discuss: Spousal influences on CEO risk-taking behavior
CEOs make decisions that shape the future of their companies. From major investments to long-term strategies, these judgement calls provide understanding into how much risk an organization is willing to take.
While decisions are often examined through the lens of the executive’s individual preferences, recent research suggests that spouses may be an influence hitting closer to home. In this faculty expert spotlight, KU Business assistant professor of finance Carina Cuculiza examines how spousal risk preferences influence risk-taking behaviors of business leaders, offering deeper insights into her co-authored research on the topic.
What sparked your initial interest in researching the correlation of spousal risk preferences to CEO risk-talking behavior?
Prior literature has identified important determinants of CEOs' corporate decisions, including their own personal characteristics, marital status, and even whether they have daughters. However, anecdotal evidence suggests that spouses’ preferences may also play a role. For instance, Mr. Marvin Ellison, the CEO of Lowe's Companies, Inc., has mentioned that he and his wife, Sharyn, operate as a team, and that she has provided valuable advice regarding his corporate decisions. Motivated by these observations, we were interested in examining whether spouses could systematically influence CEOs' decision-making.
Empirically studying this research question requires a method to quantify risk preferences. We build on recent work showing that cultural heritage shapes individuals' risk aversion and hand-collect the cultural origins of S&P 500 CEOs and their spouses. We then use the uncertainty avoidance associated with each person's country of origin as a proxy for their attitude towards risk. This allows us to measure the difference in risk attitudes between spouses and test whether it is reflected in corporate risk-taking.
How can a leader’s personal approach to risk and uncertainty influence the way they make decisions professionally?
The underlying hypothesis of our study is that CEOs’ corporate risk-taking behavior will be consistent with their attitudes towards uncertainty. Specifically, CEOs who are more comfortable with uncertainty will take more corporate risk, while CEOs who are less comfortable with uncertainty will make more conservative decisions. Importantly, our study also proposes that CEOs’ attitudes towards uncertainty will be influenced by their spouses’ attitudes towards uncertainty.
Our main measure of corporate risk-taking is the volatility of a firm’s industry-adjusted return on assets. We also use additional measures: research and development (R&D) spending, acquisition activity, and the number of lawsuits against the firm. Consistent with our hypothesis, we find that CEOs married to spouses who are relatively more averse to uncertainty adopt safer corporate policies. Overall, our results indicate that a CEO’s attitude towards uncertainty, which is in part shaped by their spouse, is reflected in their corporate risk-taking.
Why might people’s risk preferences become more aligned with those of their spouse or partner over time?
Existing studies find that in close relationships, such as marriages, individuals' personal traits and risk preferences become more aligned over time. Although we do not directly test this psychological channel, we rely on this evidence to motivate our empirical analysis. Specifically, the literature suggests that convergence in risk preferences tends to be stronger in newer relationships than in more established ones. Therefore, we test this implication and examine whether our baseline effect is stronger among couples who have been married for a shorter period (i.e., a marriage length below the median). Consistent with this prediction, the spousal influence on corporate risk-taking is stronger in newer marriages, when spouses’ preferences are likely to be more heterogeneous.
How might cultural background shape the way leaders approach uncertainty, risk and decision-making?
Culture influences how someone perceives uncertainty. We use Hofstede’s uncertainty avoidance index, based on each person’s country of ancestral origin, as a proxy for their risk attitudes, since it captures the degree to which individuals in a society are uncomfortable with ambiguity. These cultural norms tend to persist across generations and influence individuals’ risk aversion. In a corporate setting, CEOs from higher uncertainty avoidance cultures are more likely to adopt conservative policies, such as undertaking fewer acquisitions. Our study extends this evidence by showing that the spouse's uncertainty avoidance, relative to the CEO's, is also related to corporate risk-taking.
Additionally, culture affects the extent to which a CEO is influenced by their spouse. Using Hofstede’s individualism index, we find that CEOs from less individualistic cultures, where people tend to be more integrated into groups, are more strongly influenced by their spouses’ attitudes towards uncertainty.
How might shared responsibilities, such as children or a mortgage, influence the way partners approach risk and decision-making?
Lam (1987) and Becker (1991) suggest that couples who share responsibilities, such as raising children or buying a house, benefit from having more similar risk preferences. Building on these insights, we find that the spousal effect on corporate risk-taking is stronger among couples who have more children (i.e., more than the median number of children) and among couples who have a mortgage. That is, shared responsibilities and assets appear to strengthen the spouse’s influence on the CEO’s corporate risk-taking.
What does this topic suggest about the idea that business decisions are influenced by factors beyond traditional workplace or financial considerations?
CEOs are central decision makers within firms, hired for their skills, knowledge, and preferences. When making corporate decisions, CEOs typically consider input from their executive teams, including chief financial officers (CFOs), chief operating officers (COOs), and other senior management. Our findings show that the factors influencing CEOs' decisions extend beyond the workplace into the household, as spouses' preferences also affect firms' risk-taking.
Since CEOs select their spouses, a natural concern is whether our results reflect CEOs' own risk attitudes rather than those of their spouses. We perform several tests to explore this possibility and find that the effect disappears when we randomly reassign spouses and that it holds when we examine CEOs who changed spouses. Collectively, these findings indicate that, in addition to CEOs' own characteristics, the preferences of their spouses play an important role in corporate decisions.
If you could leave the public with one key insight from this research, what would it be?
Marriage is a channel through which preferences are transmitted between spouses. Our research suggests that who a CEO is married to, and how that spouse feels about uncertainty, also shapes corporate risk-taking behavior.