Applications of fixed effect models to managerial risk-taking incentives

Yin-Siang Huang, Cheng-Few Lee and Chih-Yung Lin

The Quarterly Review of Economics and Finance, 2023, vol. 92, issue C, 249-261

Abstract: In this paper, we first review the finance literature on managerial risk-taking incentives that is based on various fixed effect models (FEs). Second, we discuss the differences between industry and firm FEs with overall-, between-, and within-variations in corporate policies. Third, we investigate the effect of managerial risk-taking incentives on the values and decisions of firms as examples to support the discussion. Following Coles, Daniel, and Naveen (2006), we use Vega to measure the incentives. Our empirical results except for R&D expenditures show that a firm FE provides results consistent with other studies when we examine the effect of Vega on the values and decisions of firms. The evidence supports the idea that firms with high Vegas may have low values and capital expenditures, and high leverages and high payouts.

Keywords: Fixed effect models; Managerial risk-taking incentives; Firm values; Financing policy; Payout policy (search for similar items in EconPapers)
JEL-codes: G31 G32 G34 G35 M12 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:92:y:2023:i:c:p:249-261

DOI: 10.1016/j.qref.2023.10.004

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