۱- Introduction

۲- Data and sample characteristics

۳- Multivariate analysis

۴- Alternative explanations and robustness

۵- Conclusion

References

Abstract

I find lower firm risk in the year of a CEO divorce. This lower volatility is consistent with a reduction in risk incentives, as CEOs pay large divorce settlements and are less able to diversify firm-specific risk from their portfolios. Divorce has a larger impact on firms with cash-poor CEOs who lack diversification. Cash flow and accruals have lower volatility in the year of divorce, which is likely due to smoother discretionary expenses. The sensitivity of compensation to both price and volatility is significantly higher after divorce, suggesting compensation incentives adjust to portfolio incentives, with total compensation increasing by over $2 million on average. I find no evidence the results relate to increased distraction or alternative explanations.

Introduction

How do managers’ personal lives affect the firm? Prior literature documents the importance of personal relationships in family firms, where domestic and corporate decisions intertwine. 1 Outside the family firm, there is growing evidence regarding the value of individual executives’ personal attributes, and recent work shows how companies suffer when executives are unable to perform due to personal conflicts, such as vacation, illness, or a death in the family. Despite evidence that personal events affect the firm, there is little evidence on how family and, specifically, family law affect s managers’ incentives and corporate policies. This paper studies the impact of CEO divorce on the firm. Divorce is a significant, personal event, and it carries both emotional and economic costs. In a recent high-profile case, Harold Hamm, CEO of Continental Resources, wrote a check for $1 billion to Sue Ann Arnall following an award from a lengthy court battle (Schneyer, 2015). Despite the costs, marital dissolution is common in the U.S. with 36% of first -time marriages ending within 10 years (Copen, Daniels, Vespa, and Mosher, 2012). Given the prevalence and gravity of divorce, it provides a unique setting to examine how personal experiences affect corporate managers and the firm. Moreover, divorce is associated with a large decrease in CEO wealth, providing a unique experiment on the importance of CEO wealth to risk incentives and compensation.