 Managerial risk incentives and a firm’s financing policySigitas Karpavičius and Fan Yu Journal of Banking & Finance, 2019, vol. 100, issue C, 167-181 Abstract: This paper provides a theoretical explanation for how risk preferences of a firm’s manager impact a firm’s optimal financing policy and shareholder value. The developed model implies that firms in growing industries are more valuable if they are run by more risk-seeking managers. Similarly, firms operating in declining industries should be run by less risk-seeking managers. Given that a firm’s optimal assets do not depend on the growth opportunities, and that debt is the difference between assets and equity, the model implies that there is a negative (positive) correlation between the riskiness of CEOs’ compensation packages and firms’ financial leverage ratios for firms in growing (declining) industries. This prediction is in stark contrast to economic intuition and prior literature in that less risk aversion normally should increase risk-taking. The empirical analysis generally supports all the model’s implications except those related to firms operating in declining industries. Keywords: Capital structure; Risk preferences; Growth opportunities; Firm value (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:100:y:2019:i:c:p:167-181 DOI: 10.1016/j.jbankfin.2019.01.013 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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