The Life Cycle of a CEO Career
CEOs are rational decision-makers. Initially, finance researchers only embraced the possibility that individual investors might be subject to psychological biases. By documenting biased decisionmaking even on the part of CEOs and other top-level managers, behavioral corporate finance has magnified the importance and implications of psychological elements in finance contexts. Despite these important advances, the field of behavioral corporate finance is still young, and many important questions remain unanswered.
Three sets of questions merit emphasis:
First, with regard to CEO selection, open questions include: What role can “testing” for biases of CEO candidates play in reducing biased decision-making at the top? How do biases correlate with other, potentially performance-enhancing personality traits and skills? Do employers and selection committees value candidate characteristics differently at different stages of the selection process? Do they misvalue certain attributes?
Second, with regard to CEO decision-making, questions for future research include: Is it possible to derive new testable predictions for certain biases when jointly considering all potential uses of funds; that is, investment, accumulation of cash reserves, and payouts to shareholders? Which other managerial biases, especially in the realm of nonstandard preferences and heuristics, affect corporate outcomes? What is the relative importance of different C-suite decision-makers, and their biases, across corporate policies? What could effective corporate repairs look like?
Third, with regard to CEO dismissal: Which governance structures (including, but not limited to, CEO compensation) are optimal when CEOs are subject to biases? How do board members’ biases affect firms and corporate governance effectiveness?
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