Management Ownership and Investment in the Business Cycle

Does risk aversion amplify business cycle downturns? I study the risk exposure of CEOs and its effect on firm investment in times of high macroeconomic uncertainty. Exploiting exogenous variation in CEO equity ownership, I show that firms with larger CEO stakes decrease investment significantly more in periods of high uncertainty. I consider whether better shareholder alignment explains this finding, but do not find evidence supporting this explanation. Firms with high institutional ownership do not cut investment more in times of high uncertainty. In addition, firms with high CEO stakes decrease risk-taking in times of high uncertainty, and experience lower stock returns subsequent to periods of high uncertainty. These results are consistent with the managerial risk aversion explanation, and suggest that large inside ownership stakes can pose costs to outside shareholders in times of high uncertainty. ∗Email: [email protected]. I am very grateful to Charles Hadlock and Ted Fee for sharing data. I thank Malcolm Baker, John Campbell, Gabriel Chodorow-Reich, David Choi, Maximilian Eber, Robin Greenwood, Samuel Hanson, Matteo Maggiori, Kevin Pan, David Scharfstein, Benjamin Schoefer, Nihar Shah, Andrei Shleifer, Jeremy Stein, Adi Sunderam, as well as participants in Harvard’s Finance Lunch, for many helpful comments and suggestions.