1.1 Backgrounds and Motivations
Determining the definition and attributes of personality, Martinussen and Hunter (2010) observe that “personality is a sweeping construct”. This assertion about personality appears less exaggerated if one considers both psychology and reality. It is known that most people construct a perception of reality and then engage in behaviors based on their personality traits. This also applies to decision-makers (King, 2014). For example, people tend to be risk averse or act more conservatively if perceived by either others or themselves as cautious, careful, and organized. Conversely, people tend to have higher risk tolerance and be more innovative when they have certain characteristics, such as being bold, aggressive, and adventurous. (Galasso and Simcoe, 2011; Hirshleifer, Low, and Teoh, 2012).
Boards of directors are one of the most influential decision makers in corporate management (Adams and Ferreira, 2007). Forbes and Milliken (1999) argue that understanding the nature of effective board functioning is among the most important areas of management research. Boards select managers, decide the compensation policy of managers (Fama and Jensen, 1983) and are involved in almost every significant strategic decision, including capital investment decisions. The investment policies of a company strongly affect its financial performance. These decisions reflect decision makers’ risk
preference on a corporate level, this thesis chooses directors from S&P 500 companies who used to be pilots or are holding pilot licenses issued by the Federal Aviation Administration (FAA) as the main factor of the independent variable. It then examines whether a company has the tendency to overinvest if there is/are pilot director(s) whose attitudes and personality traits affect decision making (Hunter, 2002) on its board.
Researchers often describe pilots as sensation seekers, who pursue novelty and stimulation (Kish and Donnenwerth, 1969; Mittelstaedt, Grossbart, Curtis, and DeVere, 1976; J. Lopez-Bonilla and L. Lopez-Bonilla, 2012). Though gratified by the danger and thrills of flying, pilots must be careful conformists who are able to abide by rules meticulously (Retzlaff and Gibertini, 1987; Callister et al., 1999; Hormann and Maschke, 1996). Based on the studies on the personality traits of pilots and the importance of the board of directors to company’s development, we expect pilot directors’ audacity as well as prudence to affect their corporate investment activities. The purpose of this thesis is to observe the net effect of both personality components on the investment decision and make an important contribution to the field using an empirical study.
1.2 Literature Reviews
This thesis is related to two strands of literature. First, it is related to the body of empirical literature that investigates the effect of personal characteristics on firms’
investment decisions (Malmendier and Nagel, 2011; Malmendier, Tate, and Yan, 2011;
Cronqvist, Makhija, and Yonker, 2012; Graham, Harvey, and Puri, 2013; Davidson, Dey, and Smith, 2015). The reason for choosing pilots as the indicator is that numerous studies have been conducted on pilots (Martinussen and Hunter, 2010). The Temperament Structure Scale (TSS), which is a multidimensional personality questionnaire with 234
items, has been shown to be an effective measurement for pilot selection. The TSS parses many personality characteristics into eight dimensions to analyze an individual’s interpersonal behavior, emotions and feeling, and work and achievement (Hormann, 1996). Thus, it is possible to capture the desire for both adventure and caution of directors who are pilots (hereafter “pilot directors”) by adopting their disclosed experiences or preferences for piloting (Sunder, Sunder, and Zhang, 2017; Callister et al., 1999). This will enable determination of whether and how pilot directors are related to overinvestment or underinvestment.
Second, this thesis builds on studies of boards of directors’ function and influence on corporate policies (Chi, Tzu, Liao and Huang, 2017). Boards of directors are generally regarded as the principals of the company’s shareholders, and serve as the supervisors inspecting the performance of managers and protecting the investors (Henn, 1974).
According to Table 1 (Zahra and Pearc, 1989, p. 293), many studies have shown that boards of directors are able to exert direct influence on the firm’s investment activities whether from the perspectives of legalism, resource dependence, class hegemony, or agency theory. In addition to the supervisory role mentioned above, boards of directors often give suggestions to managers (Brickley and Zimmerman, 2010), and thus have influence over corporate policies.
Table 1
Four perspectives on boards of directors
PERSPECTIVES
Legalistic Resource Dependence Class Hegemony Agency Theory
Board Role capitalist elite over social and economic institutions.
Origins Corporate law Organizational Theory &
Sociology Marxist Sociology Economics & Finance
Representative
Support Moderate Strong Limited Moderate
Note. Reprinted from “Boards of Directors and Corporate Financial Performance: A Review and Integrative Model”, by Zahra, S. A., and Pearce, J. A., 1989, Journal of Management, 15(2), p. 293.
1.3 Contributions
The literature on pilots focuses mainly on the extraverted sides of pilots’ personality (Sunder et al., 2017), exploring traits such as their sociability, expressiveness, aggressiveness, ambitiousness, and audacity. Studies in psychology have also shown that pilots are more accepting of risk, which in turn leads to pilot CEOs being more creative and inclined to invest more in research and development (R&D) spending (Carretta and Tee, 1994; Zuckerman, 1971; Zuckerman, S. B. Eysenck, and H. J. Eysenck, 1978; King, 2014). However, it is worth noting that although pilots are found to be risk seekers, being prudent and principle-minded is also essential to successfully becoming a pilot (Hoermann and Maschke, 1993), which may result in pilot directors taking conservative measures. Furthermore, most of the studies in corporate finance on boards of directors place greater emphasis on the influence of directors’ expertise, experience, and on the independence of boards rather than directors’ personality traits. Our study adds to the large literature discussing the effects of pilot personality characteristics. We conjecture that pilot directors have the inclination for both overinvesting and underinvesting since they possess both risk-seeking and risk-averse personality traits (Martinussen and Hunter, 2010). As a result, we apply pilots’ character traits as an alternative to infer pilot directors’
risk preferences.
The remainder of this study is organized as follows. Chapter 2 describes the sample selection and reports summary statistics. Chapter 3 presents our empirical results.
Chapter4 provides robustness tests. Chapter 5 concludes this study.