Flying CEOs love leverage

Jon Moulton, founder of UK-based venture capitalist firm Alchemy, used to have a simple rule: following a series of disastrous investments, he opted to avoid companies where CEOs had been married three or more times.

Their behavior, he argued, was ruled by a something other than their head. It’s fortunate Rupert Murdoch and Donald Trump never sought private equity backing because, with that rule in place, Moulton would have been forced to walk away.

Still, with stock markets in turmoil and normal valuation models in shreds, perhaps it is time to take a new approach to investment. Matthew Cain and Stephen McKeon certainly think so.

These professors of finance from the universities of Notre Dame and Oregon, respectively, believe studying a CEO’s hobbies might be a good indication of the risks associated with his or her business strategy.

Specifically, they analyzed CEOs who like to pilot small aircraft for fun. As this activity has a fatality rate said by the academics to be 30 times higher than driving cars, it’s fair to say these high-flying CEOs have an appetite for risk.

Flying CEOs

The study, entitled ‘Cleared for take off’, analyzes the performance of 179 American CEOs who hold private pilots’ licenses and 2,900 who do not.

It covers the period between 1992 and 2009, clocking up a total of 15,627 business years and innumerable air miles. Quite deliberately, none of the subjects work in the airline industry.

The study finds businesses run by CEOs who fly themselves have higher leverage than those of their grounded peers, and are more active in M&A. The volatility of their equity returns is also higher, even after adjusting for leverage.

Much of this volatility is attributed to the acquisition activity of these pilot-led businesses. While acquisitions can often lower a corporate risk profile – because they introduce a diverse revenue stream into the mix – it seems the reverse is true for the businesses led by aviators.

Their acquisitions tend to be more successful than those completed by the ‘two feet on the ground at all times’ bosses because ‘their creativity and novelty-seeking characteristics’ lead them into deals that improve their firm’s growth prospects.

Report findings

Cain and McKeon believe there are two plausible explanations for their findings. Firstly, chief executives imprint their biological and behavioral characteristics on their company’s corporate policies.

Secondly, the CEOs tend to join businesses already involved in risky strategies because these match their daredevil personality.

So what to do with this information? Use it for recruitment purposes rather than stock picking, say the academics.

If the chairman doesn’t want to transform a calm business strategy into a white-knuckle roller-coaster ride, they suggest a quick question during the interview about flying solo might be a good idea.

If that doesn’t work, then driving records (and in particular speeding violations) might serve as a proxy.

If the candidate walks in looking like Tom Cruise in Top Gun, however, stop the interview immediately and call me. I’ll be on the first flight over.