This study examines the effect of directors’ risk preferences on investment efficiency. We define directors as less risk-averse if they possess any form of pilot license. Using a sample of S&P 500 firms between 2000 to 2010, we find that the presence of pilot directors is associated with improved investment efficiency, particularly in terms of reducing over-investment. We use a battery of empirical approaches to confirm the robustness of this relationship and eliminate endogeneity concerns. In addition, we find that efficiency improvements are concentrated on joint ventures and unconsolidated subsidiaries rather than capital expenditures. The effect of pilot directors on investment efficiency is stronger when a manager is motivated to take risks or is less entrenched, suggesting a complementary effect between the structure of the board and other mechanisms. Our findings are consistent with the hypothesis that directors’ risk preference is effective in curbing risk-related agency costs, and our findings also help further explain how board structure affects the efficacy of internal monitoring.
pilot, board of directors, investment efficiency, personality traits, risk preferences