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The Effect of Managerial Incentives to Bear Risk on Corporate Capital Structure and R&D Investment

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  • Jouahn Nam
  • Richard E. Ottoo
  • John H. Thornton Jr.

Abstract

In this study we use estimates of the sensitivities of managers’ portfolios to stock return volatility and stock price to directly test the relationship between managerial incentives to bear risk and two important corporate decisions. We find that as the sensitivity of managers’ stock option portfolios to stock return volatility increases firms tend to choose higher debt ratios and make higher levels of R&D investment. These results are even stronger in a subsample of firms with relatively low outside monitoring. For these firms, managerial incentives to bear risk play a particularly pivotal role in determining leverage and R&D investment.

Suggested Citation

  • Jouahn Nam & Richard E. Ottoo & John H. Thornton Jr., 2003. "The Effect of Managerial Incentives to Bear Risk on Corporate Capital Structure and R&D Investment," The Financial Review, Eastern Finance Association, vol. 38(1), pages 77-101, February.
    • Handle: RePEc:bla:finrev:v:38:y:2003:i:1:p:77-101
    DOI: 10.1111/1540-6288.00036
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