Does economic policy uncertainty influence executive risk-taking incentives?

Pattanaporn Chatjuthamard, Patcharawalai Wongboonsin, Kritika Kongsompong and Pornsit Jiraporn

Finance Research Letters, 2020, vol. 37, issue C

Abstract: We explore the effect of economic policy uncertainty (EPU) on managerial risk-taking incentives. Our analysis shows that EPU leads to more powerful risk-taking incentives. A rise in EPU by one standard deviation raises vega by 18.88%. Economic uncertainty, coupled with their own inherent risk aversion, motivates managers to be extra cautious during uncertain times, resulting in sub-optimal risk-taking. To offset this tendency for too little risk, firms provide more powerful risk-taking incentives to induce managers to be more aggressive. Further analysis confirms the results, including an instrumental-variable analysis, random-effects analysis, propensity score matching, and using two alternative measures of uncertainty.

Keywords: Economic policy uncertainty; Managerial risk-taking; Risk-taking incentives; Instrumental variable (search for similar items in EconPapers)
JEL-codes: D22 E66 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:37:y:2020:i:c:s1544612319301564

DOI: 10.1016/j.frl.2019.101385

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