Managerial risk aversion and corporate risk-taking

Recent studies suggest that risk-averse managers whose personal portfolios are concentrated in their own firms’ stock are more likely to avoid high-risk corporate investments. However, there is limited direct empirical evidence on whether firms led by such managers actually engage in less risk-taking. To address this gap, we develop a simple analytical model and derive testable predictions using a closed-form solution. We then empirically examine these predictions through a survey of Japanese CFOs, directly measuring both their degree of risk aversion and the proportion of their own firms’ stock in their personal portfolios. Our findings indicate that managers with higher risk aversion and less diversified portfolios tend to (1) invest less in risky projects, (2) engage more in hedging activities using derivatives, and (3) adopt lower levels of financial leverage.