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Managerial Risk-Taking Behavior and Equity-Based Compensation

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Author Info
Low, Angie (Ohio State U and Nanyang Technological U)
Abstract

I study managers' risk-taking behavior and how it is affected by equity-based compensation. I find that in response to an exogenous increase in takeover protection in Delaware during the mid-1990s, managers lower firm risk by 5%. I also find that the decrease in firm risk is concentrated among firms with low managerial equity-based incentives. In particular, firms with low CEO portfolio sensitivity to stock return volatility experience more than 10% reduction in risk. Further, firms respond to the increased protection accorded by the regime shift with greater incentives for risk-taking.

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Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2006-20.

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Date of creation: Sep 2006
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Handle: RePEc:ecl:ohidic:2006-20

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G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

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  1. Marianne Bertrand & Sendhil Mullainathan, 1998. "Is There Discretion in Wage Setting? A Test Using Takeover Legislation," NBER Working Papers 6807, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Coles, Jeffrey & Lemmon, Michael & Meschke, Felix, 2007. "Structural Models and Endogeneity in Corporate Finance: the Link Between Managerial Ownership and Corporate Performance," MPRA Paper 4374, University Library of Munich, Germany, revised 15 Feb 2007. [Downloadable!]
  3. Rauh, Joshua D., 2006. "Own company stock in defined contribution pension plans: A takeover defense?," Journal of Financial Economics, Elsevier, vol. 81(2), pages 379-410, August. [Downloadable!] (restricted)
  4. G. William Schwert, 2000. "Hostility in Takeovers: In the Eyes of the Beholder?," Journal of Finance, American Finance Association, vol. 55(6), pages 2599-2640, December. [Downloadable!] (restricted)
    Other versions:
  5. Jennifer N. Carpenter, 2000. "Does Option Compensation Increase Managerial Risk Appetite?," Journal of Finance, American Finance Association, vol. 55(5), pages 2311-2331, October. [Downloadable!] (restricted)
  6. Bebchuk, Lucian A. & Cohen, Alma, 2005. "The costs of entrenched boards," Journal of Financial Economics, Elsevier, vol. 78(2), pages 409-433, November. [Downloadable!] (restricted)
  7. Philip E. Berger & Eli Ofek & David Yermack, 1996. "Managerial Entrenchment and Capital Structure Decisions," New York University, Leonard N. Stern School Finance Department Working Paper Seires 96-14, New York University, Leonard N. Stern School of Business-. [Downloadable!]
    Other versions:
  8. Lucian Bebchuk & Alma Cohen, 2002. "Firms' Decisions Where to Incorporate," NBER Working Papers 9107, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Lucian Arye Bebchuk & John C. Coates IV & Guhan Subramanian, 2002. "The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence and Policy," NBER Working Papers 8974, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Rajesh K. Aggarwal & Andrew A. Samwick, 2003. "Why Do Managers Diversify Their Firms? Agency Reconsidered," Journal of Finance, American Finance Association, vol. 58(1), pages 71-118, 02. [Downloadable!] (restricted)
  11. Coles, Jeffrey L. & Daniel, Naveen D. & Naveen, Lalitha, 2006. "Managerial incentives and risk-taking," Journal of Financial Economics, Elsevier, vol. 79(2), pages 431-468, February. [Downloadable!] (restricted)
  12. Stephen A. Ross, 2004. "Compensation, Incentives, and the Duality of Risk Aversion and Riskiness," Journal of Finance, American Finance Association, vol. 59(1), pages 207-225, 02. [Downloadable!] (restricted)
  13. Lucian Bebchuk & Alma Cohen, 2004. "The Costs of Entrenched Boards," NBER Working Papers 10587, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Bebchuk, Lucian Arye & Cohen, Alma, 2003. "Firms' Decisions Where to Incorporate," Journal of Law & Economics, University of Chicago Press, vol. 46(2), pages 383-425, October.
  15. Rajgopal, Shivaram & Shevlin, Terry, 2002. "Empirical evidence on the relation between stock option compensation and risk taking," Journal of Accounting and Economics, Elsevier, vol. 33(2), pages 145-171, June. [Downloadable!] (restricted)
  16. John Core, 2002. "Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility," Journal of Accounting Research, Blackwell Publishing, vol. 40(3), pages 613-630, 06. [Downloadable!] (restricted)
  17. Tim Loughran & Jay Ritter, 2004. "Why Has IPO Underpricing Changed Over Time?," Financial Management, Financial Management Association, vol. 33(3), Fall.
  18. Marianne Bertrand & Sendhil Mullainathan, 2003. "Enjoying the Quiet Life? Corporate Governance and Managerial Preferences," Journal of Political Economy, University of Chicago Press, vol. 111(5), pages 1043-1075, October. [Downloadable!] (restricted)
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