The Impacts of Incentive Contracts and Hormones on Risk Taking

François Desmoulins-Lebeault, Jean-François Gajewski () and Luc Meunier ()
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François Desmoulins-Lebeault: GEM Recherche - EESC-GEM Grenoble Ecole de Management
Jean-François Gajewski: MAGELLAN - Laboratoire de Recherche Magellan - UJML - Université Jean Moulin - Lyon 3 - Université de Lyon - Institut d'Administration des Entreprises (IAE) - Lyon
Luc Meunier: ESSCA Research Lab - ESSCA - ESSCA – École supérieure des sciences commerciales d'Angers = ESSCA Business School

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Abstract: Classic corporate finance literature often emphasizes executive incentives, such as stock options, as a way to encourage risk-averse executives to adopt more risk-neutral stances. Behavioral finance studies also note the potential impact of personality variables. In a further step, the current study suggests the relevance of human biology, in the form of hormones, for predicting risk-taking. Experimental results affirm that stock-options contracts drive risk-neutral behavior, mainly due to a shift in focus from losses to gains. Among women, lower testosterone levels and higher cortisol levels encourage greater risk-taking; for men, the findings indicate an inverted U-shaped relationship between testosterone and risk-taking. These impacts are comparable in degree to the effects of contracts, for both their predictive power and economic effect. By establishing the impact of biological variables on risk-taking, this study emphasizes the need for a comprehensive behavioral approach to contract setting.

Keywords: Risk aversion; Testosterone; Cortisol; Executive compensation (search for similar items in EconPapers)
Date: 2023-03-23
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Citations: View citations in EconPapers (1)

Published in Finance, 2023, Vol. 44 (2), pp.3-36. ⟨10.3917/fina.pr.008⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04062811

DOI: 10.3917/fina.pr.008

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