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Does economic policy uncertainty influence executive risk-taking incentives?

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  • Chatjuthamard, Pattanaporn
  • Wongboonsin, Patcharawalai
  • Kongsompong, Kritika
  • Jiraporn, Pornsit

Abstract

We explore the effect of economic policy uncertainty (EPU) on managerial risk-taking incentives. Our analysis shows that EPU leads to more powerful risk-taking incentives. A rise in EPU by one standard deviation raises vega by 18.88%. Economic uncertainty, coupled with their own inherent risk aversion, motivates managers to be extra cautious during uncertain times, resulting in sub-optimal risk-taking. To offset this tendency for too little risk, firms provide more powerful risk-taking incentives to induce managers to be more aggressive. Further analysis confirms the results, including an instrumental-variable analysis, random-effects analysis, propensity score matching, and using two alternative measures of uncertainty.

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  • Chatjuthamard, Pattanaporn & Wongboonsin, Patcharawalai & Kongsompong, Kritika & Jiraporn, Pornsit, 2020. "Does economic policy uncertainty influence executive risk-taking incentives?," Finance Research Letters, Elsevier, vol. 37(C).
    • Handle: RePEc:eee:finlet:v:37:y:2020:i:c:s1544612319301564
    DOI: 10.1016/j.frl.2019.101385
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    More about this item

    Keywords

    Economic policy uncertainty; Managerial risk-taking; Risk-taking incentives; Instrumental variable;
    All these keywords.

    JEL classification:

    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis

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