Top Management Team Personal Wealth, Within-Team Diversity and the Implications for Firm-Level Risk Taking

The manager's personal wealth is one of the central building blocks of agency theory, which considers wealth to be an especially important source of individual utility. The managers' financial position, or the portion of their financial well-being that is not dependent on the firm, is also introduced in the original formulation of upper echelons theory. However, despite the importance of executive personal wealth to both theories, it is rarely mentioned, and even more scarcely studied. My research builds on and extends agency and upper echelons theories by focusing on executive personal wealth, defined here as the portion of executive net worth that is not attached to current employment at the firm (i.e., not contingent on current or future earnings). As such, this research provides an initial answer to the following research question: how does the average personal wealth of the top management team as well as within-team differences in wealth influence firm strategic choices with respect to risk?

Specifically, I argue that external wealth alters how managers view firm decisions regarding risk; thus, I hypothesize that average top management team (TMT) wealth is negatively related to firm unrelated diversification, positively related to R&D investments, and positively related to firm risk. Next, I propose that two types of within-group diversity ? TMT wealth diversity and TMT pay dispersion ? attenuate the effect of average TMT wealth on these firm outcomes. I test my hypotheses on a panel dataset of over 700 firms/TMTs from the S&P1500 over 2002?2008 using panel tobit and fixed effect models, and conduct multiple robustness checks. Empirical results strongly and consistently support the hypothesized main effects of wealth. However, the results regarding the moderating effect of within-group diversity are weak, as the majority of the moderation hypotheses are not supported. The main conclusion is that wealthier TMTs are less risk averse with respect to firm strategic decisions, which manifests in greater R&D spending, lower unrelated diversification, and higher overall firm risk. Theoretical and empirical implications as well as suggestions for future research are discussed.