Chief executive officer private firm experience and idiosyncratic risk

Abstract

Research Question/Issue

We examine chief executive officers' (CEOs) lifetime work experience in private firms and its potential influence in shaping managers' style in public firms and their corporate policies and thus the market's perception of a firm's risk.

Research Findings/Insights

We find that the idiosyncratic risk of public firms increases with the extent of CEO work experience in privately owned firms (CEO private experience). While there is no evidence of higher investment risk taking by private CEOs, the proportion of private-firm work experience has a positive association with disclosure deficiency, decrease in manager-owner agency conflicts, and an increase in political risk revelations at earnings conference calls, which, in turn, are associated with the elevation of idiosyncratic risk.

Theoretical/Academic Implications

The findings of this study underscore arguments in the upper echelons theory, imprinting theory, and behavioral agency theory. The study also has implications for literature related to corporate disclosure, governance, and political risk.

Practitioner/Policy Implications

Idiosyncratic risk is important for firms, as the literature suggests it hurts a firm's ability to finance future capital investments; therefore, it is optimal for corporate boards to have strategies in place to monitor and offer orientation packages targeted at alleviating CEO style heterogeneities presented by their prior work experience in private firms.