How Does CEO Age Affect Firm Risk?

Previous research demonstrates that older CEOs are associated with lower firm equity risk and fewer R&D expenditures. We examine the risk-taking behavior of CEOs and find that not only do older CEOs invest in less R&D, they do so sub-optimally, in the sense that CEO age distorts the effect of q on R&D investment decisions. We find that it is specifically through the channel of R&D investment that CEO age is associated with the reduction in firm equity risk. Consistent with the sub-optimality of these distortions, firms with more effective corporate governance do not exhibit these associations.