Toxic Biases in CEO Selection: Evidence from Pollution Exposure and Within-Firm Promotions

We examine whether CEO selection amplifies corporate risk-taking, using prenatal pollution exposure as a plausibly exogenous shock to risk preferences. Exposed managers are disproportionately promoted internally. Before promotion, firms with future exposed CEOs exhibit stretched working capital and expanded capacity, these positions unwind post-promotion. As CEOs, they adopt riskier external policies - higher leverage/volatility and more unrelated M&A - with lower CARs/ROA; the effects reverse after sudden CEO deaths. Identification uses two instruments (state birth-cohort shares, governor party at gestation) with weak-IV-robust inference. Results hold after conditioning on socioeconomic conditions at birth and current firm-area pollution. The patterns fit overoptimism, not overconfidence.