Managerial ability and firm risk-taking behavior

Kenneth Yung () and Chen Chen ()
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Kenneth Yung: Old Dominion University
Chen Chen: Old Dominion University

Review of Quantitative Finance and Accounting, 2018, vol. 51, issue 4, No 5, 1005-1032

Abstract: Abstract In this study, we show that managerial heterogeneity plays an important role in firm decisions. Our view is that in addition to the effects of previously examined determinants, firm decisions are affected not just by the managers’ explicit mandate to maximize firm value, but also by the ability of the manager in managing the firm. We find that high-ability managers and low-ability managers have opposite effects on firm behavior and firm value. High-ability managers are receptive to risk-taking whereas low-ability managers refrain from risk-taking. High-ability managers cut capital expenditures but spend significantly more on research and development projects; low-ability managers reduce both capital expenditures and research and development expenses significantly. High-ability managers are associated with higher levels of firm focus than low-ability managers. Managerial ability is negatively associated with firm leverage. In addition, our results show that high-ability managers are associated with increases in firm value whereas low-ability managers are associated with decreases in firm value.

Keywords: Managerial ability; Managerial attributes; Risk-taking; Firm value; Managerial incentives; Corporate governance (search for similar items in EconPapers)
JEL-codes: G31 G32 G34 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (22)

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DOI: 10.1007/s11156-017-0695-0

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