CEOs’ early-life disaster experiences and corporate hedging activities

We study how traumatic experiences in childhood influence CEOs’ risk preferences and corporate financial hedging decisions. Based on a sample of U.S. public firms from 1993 to 2020, we document a positive relation between CEOs’ early-life disaster experiences and the likelihood of firms using financial derivatives. We also find that the interactive impact of disaster experiences and financial hedging on firm value is negative, suggesting that early-life disaster experiences increase the gap between CEOs’ and shareholders’ risk preferences, potentially leading to conflicts of interest. Furthermore, our cross-sectional analysis shows that the positive relation between disaster experiences and financial hedging is more pronounced in firms with weaker corporate governance, fewer financial constraints, and higher firm-specific risk. Our findings suggest that corporate boards and regulators should maintain active oversight of corporate risk management practices, especially when early-life disaster experiences are known to influence a CEO’s risk preferences.