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Managerial incentives to take asset risk

Marc Chesney, Jacob Stromberg, Alexander F. Wagner and Vincent Wolff ()

Journal of Corporate Finance, 2020, vol. 65, issue C

Abstract: We argue that incentives to take equity risk (”equity incentives”) only partially capture incentives to take asset risk (“asset incentives”). This is because leverage, while central to the theory of risk-shifting, is not explicitly considered by equity incentives. Employing measures of asset incentives that account for leverage, we find that asset risk-taking incentives can be large compared to incentives to increase firm value. Stock holdings can induce substantial risk-taking incentives, contrary to the assumption that only stock options drive risk-taking. Finally, asset incentives help explain asset risk-taking of U.S. financial institutions before the 2007/08 crisis.

Keywords: Asset risk-taking; Compound options; Executive compensation; Financial crisis; Managerial incentives; Risk-shifting; Write-downs (search for similar items in EconPapers)
JEL-codes: G01 G28 G34 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jcorpfin.2020.101758

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