Life is Too Short? Bereaved Managers and Investment Decisions
Clark Liu, Johan Sulaeman, Tao Shu, P Eric Yeung
Review of Finance, Volume 27, Issue 4, July 2023, Pages 1373–1421, https://doi.org/10.1093/rof/rfac067
A fast-growing body of research links economic agents’ personal life experiences to their investment decisions and document relations between corporate policies and various managerial characteristics including personal finance, personal traits, and personal experience.
There are, however, two challenges to establishing the causal link between corporate policies and observable managerial characteristics. The first challenge is the possibility of omitted variables driving both corporate policies and managerial characteristics. The second issue is “endogenous matching”, i.e., the employment decisions of managers are likely to be endogenous. For example, a firm that intends to make aggressive investments may hire managers with higher risk tolerance.
To overcome these challenges, we examine whether the deaths of managers’ parents affect the investment decisions of the managers’ organizations. Since the parental death events are exogenous to the operations of the organizations managed by the bereaved individuals, this setting addresses potential concerns of omitted variables or endogenous matching.
We employ two distinct samples of managers of large organizations, including a sample of 304 U.S. mutual funds that are actively managed by managers who experience parental deaths during 1999?2013, and a sample of 295 large U.S. public firms whose CEOs experience parental deaths during 1994?2014.
We conduct difference-in-difference analyses and find that bereaved fund managers become more risk-averse in their investment decisions as they act more like quasi-indexers in the year after the parental death events. Specifically, funds with bereaved managers exhibit smaller tracking errors and lower active-share measures, indicating that they mimic their peers more after the parental death events. Furthermore, funds with bereaved managers exhibit lower idiosyncratic return volatility, higher market-beta (co-movement with index), and a shift in their portfolio allocation to larger stocks (“safer” assets).
We also document that, consistent with a long-term shift in bereaved CEOs’ risk-taking preferences, firms managed by bereaved CEOs reduce their capital expenditures in both the event year of parental death and subsequent years. These firms also reduce their merger and acquisition (M&A) activities in the event year and subsequent years. The observed effect of parental deaths on fund managers and CEOs survive a number of robustness checks including alternative test designs and sample constructions.
The reduced risk-taking by bereaved managers is consistent with the well documented phenomenon that negative emotions (i.e., anxiety) make people more risk averse. Consistent with this emotion-driven explanation, we find that the bereavement effect is more pronounced among the unexpected death events than expected death events. Additionally, the bereavement effect is stronger for single-manager funds than for team-managed funds. In contrast, we find little evidence supporting the alternative explanations such as diverted attention, lowered incentives, less effort, or inactiveness of bereaved managers. Overall, our results shed light on time-varying risk preferences of managers.
We further find that funds with bereaved managers experience a statistically and economically significant decline in performance after the bereavement events. Firms with bereaved CEOs also experience a decline in performance for during the year of bereavement event, especially for firms that are less likely to be afflicted by over-investment.