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Applications of fixed effect models to managerial risk-taking incentives

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  • Huang, Yin-Siang
  • Lee, Cheng-Few
  • Lin, Chih-Yung

Abstract

In this paper, we first review the finance literature on managerial risk-taking incentives that is based on various fixed effect models (FEs). Second, we discuss the differences between industry and firm FEs with overall-, between-, and within-variations in corporate policies. Third, we investigate the effect of managerial risk-taking incentives on the values and decisions of firms as examples to support the discussion. Following Coles, Daniel, and Naveen (2006), we use Vega to measure the incentives. Our empirical results except for R&D expenditures show that a firm FE provides results consistent with other studies when we examine the effect of Vega on the values and decisions of firms. The evidence supports the idea that firms with high Vegas may have low values and capital expenditures, and high leverages and high payouts.

Suggested Citation

  • Huang, Yin-Siang & Lee, Cheng-Few & Lin, Chih-Yung, 2023. "Applications of fixed effect models to managerial risk-taking incentives," The Quarterly Review of Economics and Finance, Elsevier, vol. 92(C), pages 249-261.
    • Handle: RePEc:eee:quaeco:v:92:y:2023:i:c:p:249-261
    DOI: 10.1016/j.qref.2023.10.004
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    More about this item

    Keywords

    Fixed effect models; Managerial risk-taking incentives; Firm values; Financing policy; Payout policy;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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