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Investment, idiosyncratic risk, and ownership

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  • Panousi, Vasia
  • Papanikolaou, Dimitris

Abstract

We find a significant negative effect of idiosyncratic stock-return volatility on investment. We address the endogeneity problem of stock return volatility by instrumenting for volatility with a measure of a firm's customer base concentration. We propose that the negative effect of idiosyncratic risk on investment is partly due to managerial risk aversion, and find that the negative relationship between idiosyncratic uncertainty and investment is stronger for firms with high levels of insider ownership. Several mecha nisms can mitigate this effect namely the use of option-based compensation and shareholder monitoring. We find that the investment-idiosyncratic relationship is weaker for firms that make use of option-based compensation, and insider ownership does not matter for firms primarily held by institutional investors.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24239.

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Date of creation: 2009
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Handle: RePEc:pra:mprapa:24239

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Keywords: investment; idiosyncratic risk; volatiltiy; ownership; stock-options;

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Citations

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Cited by:
  1. Timothy Erickson & Toni M. Whited, 2012. "Treating Measurement Error in Tobin's q," Review of Financial Studies, Society for Financial Studies, vol. 25(4), pages 1286-1329.
  2. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta-Eksten & Stephen Terry, 2013. "Really uncertain business cycles," LSE Research Online Documents on Economics 51526, London School of Economics and Political Science, LSE Library.
  3. Kang, Wensheng & Lee, Kiseok & Ratti, Ronald A., 2013. "Economic Policy Uncertainty and Firm-Level Investment," MPRA Paper 51277, University Library of Munich, Germany.
  4. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2012. "Has Economic Policy Uncertainty Hampered the Recovery?," Book Chapters, in: Lee E. Ohanian & John B. Taylor & Ian J. Wright (ed.), Government Policies and the Delayed Economic Recovery, chapter 3 Hoover Institution, Stanford University.
  5. Furfine, Craig H. & Rosen, Richard J., 2011. "Mergers increase default risk," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 832-849, September.
  6. Bachmann, Rüdiger & Born, Benjamin & Elstner, Steffen & Grimme, Christian, 2013. "Time-varying business volatility, price setting, and the real effects of monetary policy," Working Papers 01/2013, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
  7. Angeletos, George-Marios & Panousi, Vasia, 2009. "Revisiting the supply side effects of government spending," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 137-153, March.
  8. Vasia Panousi & Catarina Reis, 2012. "Optimal capital taxation with idiosyncratic investment risk," Finance and Economics Discussion Series 2012-70, Board of Governors of the Federal Reserve System (U.S.).
  9. Brent Glover & Oliver Levine, . "Idiosyncratic Risk and the Manager," GSIA Working Papers 2013-E25, Carnegie Mellon University, Tepper School of Business.
  10. George-Marios Angeletos & Vasia Panousi, 2011. "Financial Integration, Entrepreneurial Risk and Global Imbalances," NBER Working Papers 16761, National Bureau of Economic Research, Inc.
  11. Jason DeBacker & Bradley Heim & Vasia Panousi & Shanthi Ramnath & Ivan Vidangos, 2012. "The properties of income risk in privately held businesses," Finance and Economics Discussion Series 2012-69, Board of Governors of the Federal Reserve System (U.S.).
  12. Panousi, Vasia, 2009. "Capital Taxation with Entrepreneurial Risk," MPRA Paper 24237, University Library of Munich, Germany.
  13. Nikolai Roussanov & Pavel G. Savor, 2012. "Status, Marriage, and Managers' Attitudes To Risk," NBER Working Papers 17904, National Bureau of Economic Research, Inc.
  14. Klodiana Istrefi & Anamaria Piloiu, 2013. "Economic Policy Uncertainty, Trust and Inflation Expectations," CESifo Working Paper Series 4294, CESifo Group Munich.
  15. Wang, Chong & Wang, Neng & Yang, Jinqiang, 2012. "A unified model of entrepreneurship dynamics," Journal of Financial Economics, Elsevier, vol. 106(1), pages 1-23.

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