Two essays on CEO political ideoloogy : implications for differences in risk and stock market rewards

Abstract

CEO political ideology refers to whether the CEO’s personal belief system is aligned to conservativism (Republican party) or liberalism (Democrat party). The upper echelons theory (UET; Christensen, Dhaliwal, Boivie, & Graffin, 2015; Hambrick & Mason, 1984) shows how the board and CEO apply personal beliefs to firm decision-making. This study includes two essays. The first essay reviews the impact of the CEO’s political ideology on wealth effects from changes in the levels of idiosyncratic and systematic risk. Idiosyncratic risk is the expected firm-specific loss when the loss exceeds the value-at-risk (VaR) level and systematic risk is the risk inherent in the market (Yamai & Yoshiba, 2005). No prior literature has examined this linkage. The second essay analyzes differences in stock market rewards when new products are announced given the CEO’s political ideology. In particular, the study reviews the impact on firm stock performance by assessing the cumulative abnormal returns (CAR). Prior studies have not linked CEO political ideology with CAR and firm new product announcements. Both essays are expected to inform shareholders and Boards of Directors that Republican CEOs provide positive wealth effects for firms when idiosyncratic and systematic risk change and that market rewards are more favorable for Republican CEOs when new products are announced.