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Idiosyncratic Risk and the Manager

Author

Listed:
  • Oliver Levine

    (University of Wisconsin-Madison)

  • Brent Glover

    (Carnegie Mellon University)

Abstract

Compensating a manager with equity-based pay induces effort but also exposes the manager to firm-specific risk. In comparison to a diversified shareholder, this distorts the manager's discount rate and, in turn, investment and financing decisions. We embed this agency conflict in a structural model of the firm and estimate its effect on firm policies. We estimate the agency friction for a large panel of U.S. public firms and find significant cross-sectional and time-series variation in a manager's incentive to over- or under-invest. Our panel of incentive estimates helps to explain a broad set of empirical patterns, including investment, leverage, cash holdings, valuation ratios, and acquisition activity.

Suggested Citation

  • Oliver Levine & Brent Glover, 2014. "Idiosyncratic Risk and the Manager," 2014 Meeting Papers 736, Society for Economic Dynamics.
  • Handle: RePEc:red:sed014:736
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    File URL: https://economicdynamics.org/meetpapers/2014/paper_736.pdf
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    References listed on IDEAS

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    Cited by:

    1. Stephen J. Terry, 2015. "The Macro Impact of Short-Termism," Discussion Papers 15-022, Stanford Institute for Economic Policy Research.

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