Toxic Origins, Toxic Decisions: Unpacking Biases in CEO Selection

P. Raghavendra Rau | YiLin Wu | Richard Lok-Si Ieong

Sep 3, 2025

Key Takeaways

Research Question: Do firms mistake luck for skill when promoting internally successful managers—especially those with unobserved risk-taking tendencies—and how does this bias shape corporate risk-taking at the top?
Method and Data: The authors use prenatal exposure to toxic pollution as an exogenous proxy for risk tolerance, identifying “Superfund CEOs” born in counties later designated as Superfund sites. The analysis covers 3,001 U.S.-born S&P 1500 CEOs (1992–2018), employing instrumental variable (IV) and difference-in-differences (DiD) strategies to isolate firm-side selection effects.
Main Findings: Superfund CEOs are disproportionately promoted internally and, once in office, adopt riskier external financial policies—higher leverage, lower cash, more unrelated acquisitions—that tend to underperform and raise firm-level volatility.
Yet, these CEOs excel in internal operations, enhancing productivity, asset turnover, and working-capital efficiency—especially in contained roles where risks are manageable and outcomes are reversible.
Implication: Firms may systematically conflate risky success with talent, promoting high-variance individuals ill-suited for exposed, high-stakes leadership. The study uncovers a structural channel through which executive selection distorts firm-level risk, offering a new lens for governance reform.

Source Publication: Rau, P. Raghavendra, Wu, YiLin, & Ieong, Richard Lok-Si. (2025). Toxic Origins, Toxic Decisions: Biases in CEO Selection. SSRN Working Paper.

Background and Motivation

CEOs shape strategic decisions that influence firm risk and value, and a growing body of research has explored how individual traits—often shaped by early life experiences—affect executive behavior. Yet, most studies assume firms passively inherit CEO traits without interrogating the promotion process itself. This paper goes a step further: Can firm-level selection mechanisms amplify hidden risk-related traits? And could these traits originate as early as the prenatal stage?

To explore this question, the authors focus on CEOs born in U.S. counties that were later designated as Superfund sites. These sites, identified by the EPA as containing hazardous pollutants, offer a unique quasi-natural experiment. Because most families were unaware of pollution risks before the 1980s, prenatal exposure can be treated as exogenous—allowing the authors to isolate the causal effect of early-life toxic exposure on executive behavior and career trajectories.

Data and Methodology

The authors assemble a dataset of 3,001 U.S.-born CEOs from S&P 1500 firms listed in Execucomp between 1992 and 2018, tracking each executive’s birth county. They identify 734 “Superfund CEOs” born in counties that housed actively polluting Superfund sites during their year of birth, based on EPA records covering 1,803 sites. To isolate the effect of prenatal exposure, the analysis accounts for pollutant-accumulation periods and excludes sites with postnatal contamination.

The empirical strategy combines multiple approaches. The authors begin with reduced-form analyses, including probit, OLS, Tobit, ordered probit, and Cox proportional hazards regressions. They then introduce an IV based on local birth density to strengthen causal identification. A DiD framework, exploiting sudden CEO deaths as exogenous turnover events, further tests whether firms actively select these Superfund-exposed individuals. Robustness checks include matched samples, falsification tests, and a battery of fixed effects—controlling for CEO birth year, firm and industry characteristics, headquarters location, and more.

Main Findings

The study reveals Superfund-exposed CEOs are significantly more likely to be promoted from within, especially in family firms where founding members hold non-executive roles. Their early success tends to arise in contained operational environments, where risks are reversible and feedback is immediate. Indeed, these CEOs exhibit superior internal performance—higher asset turnover, more efficient working-capital management, and better employee productivity.

However, once promoted, the same executives pursue significantly riskier external financial policies. They maintain lower cash reserves, increase leverage, and undertake more unrelated acquisitions. These decisions, less amenable to course correction, result in elevated stock return volatility, downgraded credit ratings, and higher borrowing costs. Average firm performance suffers, and CEO turnover accelerates. Although some of these individuals produce exceptional outcomes, their behavior aligns more closely with overoptimism (overestimating expected value) than overconfidence (underestimating risk).

The IV and DiD analyses support the causal chain: firms appear to inadvertently select these individuals due to past successes in lower-stakes roles, not due to conscious preference for high-risk profiles. Their prenatal exposure, which is invisible to firms, interacts with promotion systems that misinterpret random success as skill—especially in environments lacking mechanisms to discern the nature of underlying risk preferences.

Implications

This study introduces a novel, biologically grounded channel through which firm-level selection processes can generate systemic risk. Firms may unknowingly promote leaders whose behavioral traits—rooted in early-life exposure to environmental toxins—align poorly with the demands of strategic decision-making. These traits are amplified by internal promotion systems that reward apparent past success, regardless of whether such success stemmed from skill or survivorship in high-variance environments.

The findings challenge the traditional separation between personal background and professional competence, raising serious concerns about the adequacy of current executive-selection frameworks. For boards and investors, the research underscores the need to distinguish between performance in contained versus exposed risk environments. More broadly, it illustrates how seemingly unrelated public policy domains—such as environmental regulation—can have long-run consequences for corporate governance and financial stability.