Are Female Executives More Risk-Averse Than Male Executives?

By Iqbal, Zahid; Sewon, O. et al. | Atlantic Economic Journal, March 2006 | Go to article overview

Are Female Executives More Risk-Averse Than Male Executives?


Iqbal, Zahid, Sewon, O., Baek, H. Young, Atlantic Economic Journal


Introduction

Are female executives more risk averse compared to their male counterparts? This paper addresses this issue by comparing stock trading behavior between male and female executives in response to stock option awards. A number of prior studies show that women are more risk averse than men. Hersch [1996] finds that women make safer choices than men when it comes to making risky consumer decisions such as smoking behavior, seat-belt use, preventive dental care, and having regular blood pressure checked. Pacula [1997] observes that women exhibit greater risk aversion to drug use than men.

In the area of financial decisions, a number of prior studies document that females are less likely to take risk than males. Most of these studies examine the allocations of pension assets by gender and find that females invest less in risky investments such as common stock [Bernasek and Shwiff, 2001; Bajtelsmit et al., 1999; Sunden and Surette, 1998; Bajtelsmit and VanDerhei, 1997; Hinz, McCarthy, and Turner, 1997]. In Bernasek and Shwiff [2001], for example, gender is the most significant factor explaining the allocation of the defined contribution pension to stocks. They find men allocate more of their pension fund to stocks than women.

In addition to pension asset allocations, propensity of risk taking by gender is measured by examining household wealth allocations and psychological traits. Jianakoplos and Bernasek [1998] in their survey paper examine the role of gender between household wealth and other socioeconomic factors and the proportion of risky assets held. They find that the magnitude of decrease in risk aversion due to an increase in household wealth is smaller for single women than for single men. Also, 63 percent of single women were not willing to take any financial risk with their investments versus 43 percent for single men. Overall, single women are relatively more risk averse than single men. Using household data, Barber and Odean [1999] show that women invest in less risky positions than men where risk is defined in terms of volatility of portfolio and individual security returns, beta of the security, and size of the investment. Sexton and Bowman-Upton [1990] examine the psychological traits of growth-oriented male and female entrepreneurs and find that females score significantly less on traits related to risk-taking. In computerized laboratory experiments, Powell and Ansic [1997] observe that women are less risk seeking than men. Overall, these studies support the view that women prefer less risk than men in their financial decision-making. (1)

A recent study by Ofek and Yermack [2000] shows that those managers who already own a large investment in the firm's stock will start selling their shares when new stock options are awarded to them. Such stock selling provides diversification benefits to the executive and is an indication that he is risk averse. According to Ofek and Yermack [2000], the magnitude of executive's stock selling is closer to the optimal hedge ratio of 60 percent. That is, the executive sells 600 shares that he already owns for every 1,000 shares of new stock options that he receives.

Following prior empirical studies that women are generally more risk averse than men, the authors hypothesize that female executives will sell more shares of the firm's stock than male executives in response to stock option awards. The authors also predict that it will be the female executives who sell shares in proportion to the hedge ratio of 60 percent. Contrary to the prediction, it is found that the female executives sell a smaller number of shares than the male executives once new stock options are awarded. This is true even after controlling for the levels of executive stock ownership. Male executives with high level of ownership seem to sell shares based on hedge ratio of 60 percent. The findings are consistent with those in Bliss and Potter [2002] that women take more risk than men. …

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