research@hec - Issue #6 - (Page III)

Why CEOs Nearing Retirement are Averse to Risk Key ideas detrimental to company growth. in part indexed to the company’s stock value) from any loss in value. company stock value can be damaging for the company. • The reluctance of CEOs approaching retirement to engage in short-term risk-taking can be • The remuneration model that indexes part of the CEO’s compensation upon retirement to • This aversion to risk is based on two concerns: (1) CEOs are not keen to taking risks that may taint their reputations in their final years; and (2) they want to preserve their assets (which are The rising number of press articles attributing the success and failure of major firms to their CEOs led Matta and Beamish to study the CEOs role in strategic decision-making. How did CEOs influence their company’s long-term investments? The two researchers provide an initial answer to this question by examining the risk-taking behaviour of CEOs nearing retirement in the context of international acquisitions. M WHY WAS INTERNATIONAL ACQUISITIONS CHOSEN AS THE CONTEXT FOR THE STUDY? Elie Matta and Paul W. Beamish studied the international acquisitions made by 293 major American firms between 1995 and 1999. By studying acquisitions (as opposed to R&D investments, for instance, which are part of a more long-term strategy — less variable and more visible), the researchers were able to focus on short-term decisions that directly involved the CEO. The empirical study of international acquisitions made in the second half of the 1990s, incurring significant up-front costs,, was particularly interesting as it revived the notion of managerial risk-taking. Elie Matta points out, however, that although the study uses acquisitions for its context, the theoretical arguments of the study can be applied to risk-taking in general. THE IMPACT OF CAREER HORIZON ON RISKTAKING The two researchers’ observations show that CEOs with shorter career horizons are less likely to engage in international acquisitions. Elie Matta explains that CEOs approaching retirement avoid risky strategic choices, as returns often cannot be predicted. The application of the agency theory, which suggests that attempting to align the CEO’s (agent) decision horizon with shareholders’ (principals) interests by enlisting the former to commit to ensuring the company’s long-term financial performance, does not produce the desired results as the CEO nears retirement. By integrating behavioural arguments (prospect theory), the researchers suggest that the CEO’s aversion to loss (heightened close to retirement) encourages him to make decisions that maintain stability in the medium term, whereas shareholders would prefer decisions aimed at ensuring the company’s future growth. This explains the gap between CEOs’ short-term reasoning as they near retirement (and who therefore lose interest in the company’s future results) and the shareholders’ long-term interests. BIOGRAPHY Elie Matta holds a PhD in Business Administration from the Richard Ivey School of Business at the University of Western Ontario, Canada. Since September of 2004, he has been Assistant Professor of Management and HR at HEC Paris. His research interests centre primarily on agency and prospect theory with a focus on CEOs, executive compensation, managerial risk-taking and international strategy. Matta is also the recipient of various awards and scholarships, including the J. Armand Bombardier PhD Fellowship in Global Management and the University of Western Ontario Plan for Excellence Award. December - January 2009 • research@hec III http://www.hec.edu/Faculty/Professors-alphabetical-list/(professor)/Matta

Table of Contents for the Digital Edition of research@hec - Issue #6

Contents
Research at HEC: My Opinion
Why CEOs Nearing Retirement are Averse to RiskGovernance Certification
Building Innovation by Strengthening Bridges
Rating agencies and firms: the attribution of ratingsproperty rights

research@hec - Issue #6