Managerial incentives for risk-taking and internal capital allocation

Lorenzo Casavecchia and Ja Young Suh
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Ja Young Suh: Finance Discipline Group, University of Technology Sydney, Ultimo, NSW, Australia

Australian Journal of Management, 2017, vol. 42, issue 3, 428-461

Abstract: In this study, we show that the option-like structure of equity-based compensation encourages managerial risk-taking and provide new evidence on the way in which CEO’s risk-taking could manifest itself in a multi-segment firm. Our results show that a greater sensitivity of managerial compensation to shareholder wealth—as proxied by CEO’s portfolio vega—leads to greater risk-taking through active capital allocation . We then analyze the impact of risk-taking on shareholder wealth and demonstrate that risk-taking is positively associated with future stock returns. Overall, this article contributes to the literature by providing evidence that equity-based compensation does actually promote the alignment of interests between shareholders and managers.

Keywords: Equity-based compensation; internal capital allocation; risk-taking (search for similar items in EconPapers)
JEL-codes: G30 M12 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:42:y:2017:i:3:p:428-461

DOI: 10.1177/0312896216652181

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