The face of risk: CEO facial masculinity and firm risk

• Published date: 01 March 2019
• Date: 01 March 2019
• DOI: http://doi.org/10.1111/eufm.12175

Eur Financ Manag. 2019;25:239–270. wileyonlinelibrary.com/journal/eufm © 2018 John Wiley & Sons, Ltd. 239

DOI: 10.1111/eufm.12175

ORIGINAL ARTICLE

The face of risk: CEO facial masculinity and

firm risk

Shinichi Kamiya

1

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Y. Han (Andy) Kim

2

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Soohyun Park

3

1

Nanyang Business School, Nanyang

Technological University, S3-B1B-64,

Nanyang Avenue, Singapore 639798

Email: skamiya@ntu.edu.sg

2

SungKyunKwan University (SKKU),

Room 422, Business School Building,

Jongno-gu, Seoul 03063, Korea

Email: ayhkim@skku.edu

3

SungKyunKwan University (SKKU),

#90206, International Hall, Jongno-gu,

Seoul 03063, Korea

Email: tngusqkr1@skku.edu

Abstract

We examine whether a male CEO's facial masculinity,

measured by facial width-to-height ratio (fWHR), predicts

the riskiness of his firm. Using the face pictures of 1,162

CEOs in the Execucomp database, we find supporting

evidence. Firms with more masculine-faced CEOs have

higher stock return volatility and higher financial leverage

and are more acquisitive. Their frequency of acquisitions,

the dollar amount spent on acquisitions, and the takeover

premium are all higher. We find that more masculine-faced

CEOs’compensation is more sensitive to the risk of the

firm. The result is robust when we use AI (artificial

intelligence)-measured fWHR of the CEOs.

KEYWORDS

CEO, fWHR, leverage, M&A, masculinity, risk, testosterone, VEGA

JEL CLASSIFICATION

G02, G32, G34, M1, Z1

We thank thank John Doukas, the editor, and the anonymous referee of European Financial Management for giving us

great comments to improve the quality of our paper. We thank the session participants at the AFA 2017 in Chicago, FMA

Asian Conference in Seoul, 2015, Korea Finance Association Annual Meeting 2015, Cambridge University, SKKU,

University of Edinburgh, and UNIST. We thank Malcolm Baker, Jong-bom Chay, Henrik Cronqvist, Stephen Dimmock,

John Griffin, Umit Gurun, Gerard Hoberg, Jarrad Harford, Mark Humphrey-Jenner, Jennifer Lerner, Christian Leuz, Angie

Low, Jun-Koo Kang, Ulrike Malmendier, Chris Parsons, Richard Roll, Burkard C. Schipper (AFA discussant), and

Jungwon Seo for insightful comments. We also thank the great research assistantship of Yujing Ma, Matthew Lim, Nico

Dharmawan, You Ye, Li Rui, Yong Mei Ling, Loo Pei Yu, Liew SiQi, Fam Suen Li, Goh Hui Min, Youngjae Jay Choi,

Tae Hoon Jeon, Seung Deok Shin, Liang Sihui, Lim Shi Bin, Goh Le Min, and Xu Fuqui. All errors are our own. Our

Python code is available upon request.

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INTRODUCTION

In the upper echelons of corporate management, the literature stemming from Bertrand and Schoar

(2003) finds a significant impact of the traits of the CEO on firm decision-making. On the behavioral

front, the association between CEO overconfidence and corporate performance has been widely

studied. For example, the impact of CEO overconfidence or self-attribution bias on corporate

investment (Ben-David, Graham, & Harvey, 2013; Malmendier & Tate, 2005), acquisitions (Doukas &

Petmezas, 2007; Kim, 2013; Malmendier & Tate, 2008), innovation (Hirshleifer, Low, & Teoh, 2012),

and many other areas have been examined. Recently, researchers found that the biological traits of the

CEOs, especially, facial masculinity, are linked to corporate financial policies and performance

(Gomulya, Wong, Ormiston, & Boeker, 2016; Jia, van Lent, & Zeng, 2014; Wong, Ormiston, &

Haselhuhn, 2011).

1

Recent literature in neuroendocrinology established that men's facial width-to-height ratio (fWHR,

hereafter) predicts masculine social behaviors that are linked to occupying dominant positions under

competition. Carré and McCormick (2008) and Christiansen and Winkler (1992) find that high

fWHR is associated with more aggressive behavior. Campbell et al. (2010) find that fWHR predicts

sensation-seeking behavior. Haselhuhn and Wong (2011) find that high-fWHR persons are more likely

to cheat their negotiation partners for financial gain. Thus, Stirrat and Perrett (2010) find that men with

high fWHR are perceived as less trustworthy. However, Stirrat and Perrett (2012) find that in an

inter-group competition setting, the men with high fWHR cooperate more with other in-group

members and show more self-sacrificing cooperation to win the competition against the other groups.

Hence, Wong et al. (2011) find that male CEOs with high fWHR achieve better financial performance

than male CEOs with low fWHR do. Jia et al. (2014) find that masculine-faced CEOs are more likely to

misreport accounting statements. Gomulya et al. (2016) interpret the masculine face as less trustworthy

and find that executives with high fWHR are less likely to be appointed as the CEO after the dismissals

of CEOs with financial misconduct. Extending the literature, we study whether the CEOs with more

masculine faces make the firms more risky and spend more resources in acquisitions to achieve

dominant positions in the industry.

Whether facial masculinity is directly affected by testosterone, a steroid hormone that drives a

person to take more risk to occupy a dominant position in a competitive setting, is still under debate in

the literature. Verdonck, Gaethofs, Carels, and de Zegher (1999), Nie (2005), Thornhill and Møller

(1997), Thornhill and Gangestad (1999), and Lindberg et al. (2005) document that more testosterone

during the pubertal stage makes the facial bone grow to be more masculine with higher fWHR. Pound,

Penton-Voak, and Surridge (2009) find that more masculine-faced males show higher circulating

testosterone level after winning a competitive task than less masculine-faced males do. In contrast,

experimenting with 91 Tsimane tribe adolescents in the South American jungle, Hodges-Simeon,

HansoSobraske, Samore, Gurven, and Gaulin (2016) document that fWHR is not affected by pubertal

testosterone level. However, once they control for the age of the subjects, they still find significant

association between fWHR and testosterone. Moreover, an individual's fWHR does not change

significantly over time, particularly after puberty (Jia et al., 2014). Lefevre, Lewis, Perrett, and Penke

(2013) find that fWHR is significantly positively correlated with both the levels of baseline

(circulating) and reactive testosterone. Additionally, Penton-Voak and Chen (2004) find that males

with facial masculinity have higher testosterone levels in their saliva.

1

Adams, Keloharju, and Knüpfer's (2016) study finds that some traits are related to career success to become CEOs as in

Du, Gao, and Levi (2012).

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The level of testosterone is thought to be associated with the person's behaviors through neural

mechanisms (Dabbs & Mallinger, 1999; Mehta & Beer, 2010). Studies have uncovered that a set of

related behavioral characteristics are associated with testosterone levels. These include aggression

(Archer, 2006), sensation-seeking (Roberti, 2004), hostility (Hartgens & Kuipers, 2004), dominance

(Mazur & Booth, 1998; Sherman, Lerner, Josephs, Renshon, & Gross, 2016), egocentrism

(Eisenegger, Naef, Snozzi, Heinrichs, & Fehr, 2010), and risk-seeking (Apicella et al., 2008).

2

Apicella et al. (2008) find that men with masculine faces as a proxy for higher testosterone exposure

during puberty are more likely to make risky financial decisions. Sapienza, Zingales, and Maestripieri

(2009) and Stenstrom, Saad, Nepomuceno, and Mendenhall (2011) show that risk aversion is

negatively related to prenatal testosterone exposure measured by the ratio of the length of the second

(index) finger to the length of the fourth (ring) finger (2D:4D ratio).

3

Coates, Gurnell, and Rustichini

(2009) find that a lower 2D:4D ratio of male traders delivers better trading performance.

4,5

Our argument is slightly different from proposing more gender diversity as in Huang and Kisgen

(2013), Adams and Ragunathan (2017), or Faccio, Marchica, and Mura (2016). Instead, we study

whether, within the same gender (specifically male) group, the different levels of masculinity of the

CEO drive the firm to be systematically different in terms of risk and dominance, supporting behavioral

consistency theory (Epstein, 1979; Funder & Colvin, 1991). The CEOs of large corporations and the

bankers around the world have been criticized for their masculinity-driven culture, particularly after

the financial crisis in 2008, because of their excessive risk-taking behavior before the crisis (Adams &

Ragunathan, 2017; Sherman, 2012).

6

A recent report by Perman (2012) reveals that testosterone

therapy became popular among Wall Street traders and some corporate CEOs, because it helped them

to be more masculine and be more willing to take risks. Therefore, it is imperative to study the impact of

the masculinity of the CEO on the risk of the firm: Just how much does masculinitymake the firm more

risky?

Based on our hand-collected face pictures of 1,162 unique CEOs in Execucomp (largest 1,500

public US firms) in non-financial industries, our multiple regression analyses show a significantly

positive association between fWHR and the risk of the firm measured by return volatility of the firm

controlling for CEO's overconfidence (Malmendier & Tate, 2005). In addition, to make sure that what

we find is not driven by some extreme values of our explanatory variable, we use alternative measures

of fWHR, such as the inverse rank of fWHR (the highest fWHR CEO having the largest ordinal

number), the dummy variables that are one if the CEO belongs to the highest quantiles of fWHR, and

find consistent results. Moreover, for the first time in the literature, we use artificial intelligence (AI) to

measure the fWHR automatically to steer clear of human error in measuring fWHR and find consistent

results in our robustness check section.

For CEOs to influence the risk of the firm, the channel should be either through the capital structure

decision or the capital budgeting decision (Brealey, Myers, Allen, & Mohanty, 2012). Therefore, we

2

Other studies include Mehta, Jones, and Josephes (2008), Pound et al. (2009), and Zuckerman and Kuhlman (2000) for

risky behavior; Wright et al. (2012) for egocentric behavior. Other studies include Van Honk and Schutter (2007), Wirth

and Schultheiss (2007), and Josephs, Sellers, Newman, and Mehta (2006).

3

Higher (lower) prenatal testosterone causes lower (higher) 2D:4D ratio.

4

Coates, Gurnell, and Sarnyai (2010) summarize their findings and provide an excellent survey of the relationship between

steroid hormones and financial risk-taking.

5

However, whether testosterone is really driving the risk-taking behavior is also debated. Schipper (2014) fails to find a

significant relationship between testosterone and risk aversion in competitive bidding experiments.

6

Some people in the Wall Street Journal noted that Lehman Brothers might have been safer if it was Lehman Sisters or

Lehman Brothers and Sisters (Kristof, 2009).