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Management Ownership and Risk-Shifting Investment

Author

Listed:
  • Nobuyuki Teshima

    (School of Commerce, Senshu University, Japan)

Abstract

This study analyzes the relationship between management ownership and its risk-shifting incentive. We first present a simple model showing that the risk-shifting incentive of management of financially distressed firms increases as the management ownership of the firm increases. Empirically, we test the hypothesis that under the former Japanese Corporate Reorganization Law, firms with higher management ownership are more likely to use legal rather than private reorganization. Since the reorganization process under the law virtually eliminates the possibility of risk-shifting investment, creditors are more likely to prefer the legal process to private process, when management ownership is higher. Empirical results are consistent with the hypothesis.

Suggested Citation

  • Nobuyuki Teshima, 2012. "Management Ownership and Risk-Shifting Investment," The Japanese Accounting Review, Research Institute for Economics & Business Administration, Kobe University, vol. 2, pages 75-85, December.
  • Handle: RePEc:kob:tjrevi:dec2012:v:2:p:75-85
    as

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    File URL: http://www.rieb.kobe-u.ac.jp/tjar/article/vol2/pdf/4.Teshima.pdf
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    References listed on IDEAS

    as
    1. Wruck, Karen Hopper, 1990. "Financial distress, reorganization, and organizational efficiency," Journal of Financial Economics, Elsevier, vol. 27(2), pages 419-444, October.
    2. Stuart C. Gilson, 1991. "Managing Default: Some Evidence On How Firms Choose Between Workouts And Chapter 11," Journal of Applied Corporate Finance, Morgan Stanley, vol. 4(2), pages 62-70.
    3. Kaplan, Steven N, 1994. "Top Executive Rewards and Firm Performance: A Comparison of Japan and the United States," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 510-546, June.
    4. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    5. Sadahiko Suzuki & Richard W Wright, 1985. "Financial Structure and Bankruptcy Risk in Japanese Companies," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 16(1), pages 97-110, March.
    6. Gilson, Stuart C., 1990. "Bankruptcy, boards, banks, and blockholders : Evidence on changes in corporate ownership and control when firms default," Journal of Financial Economics, Elsevier, vol. 27(2), pages 355-387, October.
    7. Franks, Julian R. & Torous, Walter N., 1994. "A comparison of financial recontracting in distressed exchanges and chapter 11 reorganizations," Journal of Financial Economics, Elsevier, vol. 35(3), pages 349-370, June.
    8. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-264, April.
    9. Dong-Kyoon Kim & Chuck Kwok, 2009. "The influence of managerial incentives on the resolution of financial distress," Review of Quantitative Finance and Accounting, Springer, vol. 32(1), pages 61-83, January.
    10. Gilson, Stuart C., 1989. "Management turnover and financial distress," Journal of Financial Economics, Elsevier, vol. 25(2), pages 241-262, December.
    11. Gilson, Stuart C. & John, Kose & Lang, Larry H. P., 1990. "Troubled debt restructurings*1: An empirical study of private reorganization of firms in default," Journal of Financial Economics, Elsevier, vol. 27(2), pages 315-353, October.
    12. Brown, David T, 1989. "Claimholder Incentive Conflicts in Reorganization: The Role of Bankruptcy Law," Review of Financial Studies, Society for Financial Studies, vol. 2(1), pages 109-123.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Management Ownership; Risk Shifting; Debt Restructuring; Reorganization; Bankruptcy;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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