A General Form Model Of Managerial Incentives And Risk Taking
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A General Form Model Of Managerial Incentives And Risk Taking
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Author : Jonathan Fluharty-Jaidee
language : en
Publisher:
Release Date : 2017
A General Form Model Of Managerial Incentives And Risk Taking written by Jonathan Fluharty-Jaidee and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with categories.
The extant literature has used measurements of CEO risk-taking incentives which do not include the effects of termination provisions such as severance agreements. This paper provides a general form model that allows for the valuation and computation of CEO compensation structures including termination provisions. Constructing and using CEO 'death tables' as estimates for expected remaining CEO tenure this paper computes a complete estimate for vega as a proxy for CEO risk-taking incentives but also proposes a new, more direct, measure of risk-taking incentives -- compensation gamma. Results show that vega, regardless of whether termination provision are included, may be related to firm size, share prices, and R&D intensity and CAPEX intensity -- traditional proxies for risk-taking. Gamma is a direct measure of convexity of CEO compensation and proves to be more consistent with respect to firm size and share price. This paper also documents that severance increases risk-taking incentives under normal conditions.
Managerial Incentives And Risk Taking
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Author : Naveen D. Daniel
language : en
Publisher:
Release Date : 2014
Managerial Incentives And Risk Taking written by Naveen D. Daniel and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
This paper provides empirical evidence of a strong causal relation between the structure of managerial compensation and investment policy, debt policy, and firm risk. Controlling for CEO pay-performance sensitivity (delta) and the feedback effects of firm policy and risk on the structure of the managerial compensation scheme, we find that higher sensitivity of CEO wealth to stock volatility (vega) implements riskier policy choices, including relatively more investment in Ramp;D, less investment in property, plant and equipment, more focus on fewer lines of business, and higher leverage. At the same time, we find that riskier policy choices in general lead to compensation structure with higher vega and lower delta. Stock-return volatility, however, has a positive effect on both vega and delta.
Managerial Incentives Risk Management And Accounting Policy
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Author : Sonku Kim
language : en
Publisher:
Release Date : 1996
Managerial Incentives Risk Management And Accounting Policy written by Sonku Kim and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1996 with categories.
Risk Return Tradeoffs And Managerial Incentives
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Author : David Tsui
language : en
Publisher:
Release Date : 2015
Risk Return Tradeoffs And Managerial Incentives written by David Tsui and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2015 with categories.
Moral hazard theory posits that managerial risk aversion imposes agency costs on shareholders, and firms respond by providing risk-taking incentives to mitigate these costs. The underlying assumption in this literature is that increasing shareholder value requires increasing risk, yet there is limited empirical evidence supporting this assumption or the role of such risk-return tradeoffs in incentive compensation design. Using measures based on the firm's stock price, I find that shareholder value increases with risk, consistent with managerial risk aversion imposing agency costs on shareholders. I also find that firms provide managers with more risk-taking incentives when this risk-return relation is more positive and thus potential risk-related agency costs are more severe. This finding is strongest among firms where value increases with idiosyncratic rather than systematic risk, consistent with theory that these agency costs arise primarily from managers' exposure to idiosyncratic risk. Overall, these results are consistent with firms designing managerial compensation contracts to mitigate risk-related agency costs. Additional findings highlight that the incentives from equity-based compensation depend on the risk-return tradeoffs that managers face, providing one explanation for the conflicting results in prior literature regarding the incentives from managerial stock price exposure.
Value Risk Tradeoffs And Managerial Incentives
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Author : David Tsui
language : en
Publisher:
Release Date : 2018
Value Risk Tradeoffs And Managerial Incentives written by David Tsui and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018 with categories.
I examine the relation between shareholder value and managerial risk-taking and how this value-risk tradeoff influences managers' incentive compensation packages. I find that shareholder value increases with risk and therefore managerial risk aversion creates potential agency conflicts between managers and shareholders. I also find that firms provide managers with stronger risk-taking incentives when value-risk tradeoffs are steeper (i.e., the marginal benefit of risk-taking is greater) and therefore potential risk-related agency costs are more severe, particularly when shareholder value increases with idiosyncratic (rather than systematic) risk and managers are more risk-averse. Collectively, these results suggest that firms deliberately provide managers with risk-taking incentives to address risk-related agency conflicts and these incentives do not encourage widespread “excessive” risk-taking. I also provide an explanation for conflicting prior evidence on the incentive effects of managers' stock holdings by showing that these incentives vary based on firms' value-risk tradeoffs.
Managing Through Incentives
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Author : Richard B. McKenzie
language : en
Publisher: Oxford University Press
Release Date : 1998-09-24
Managing Through Incentives written by Richard B. McKenzie and has been published by Oxford University Press this book supported file pdf, txt, epub, kindle and other format this book has been release on 1998-09-24 with Business & Economics categories.
Incentives are the most powerful tools executives can use to improve worker performance. This is particularly true in today's empowered workplace, where incentives can ensure that workers apply their initiative toward company goals. Now, in this groundbreaking book, Richard McKenzie and Dwight Lee show how to select the right incentives and how to use them for best results. Generously illustrated with examples from business, industry, government, academia, and professional sports, this superb volume offers a comprehensive overview of incentives, both in theory and in practice, providing a wealth of ideas managers can use to get employees to work harder, smarter, and more cooperatively. Much of the book is quite eye-opening. For instance, while McKenzie and Lee recognize that money is the prime motivator, they urge managers not to overlook the power of non-monetary incentives, carefully evaluating such motivators as fringe benefits, psychological incentives, education, and training. And they examine a host of other issues, including how to take advantage of executive "overpayment" to increase profits; the limits of piece-rate and other pay-for-performance schemes; finding the right balance between current pay and a more generous pension plan; the value of tough bosses; and hostile takeovers as a form of managerial incentive. How workers are rewarded is often more important than how much they are rewarded, say the authors. The job of good managers is getting the incentives right. Managing Through Incentives shows managers how to apply proven motivators to help any size firm energize the work force, increase its profits, and meet the awesome challenges of today's fiercely competitive global economy.
Managerial Incentives To Increase Risk Provided By Debt Stock And Options
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Author : Joshua D. Anderson
language : en
Publisher:
Release Date : 2017
Managerial Incentives To Increase Risk Provided By Debt Stock And Options written by Joshua D. Anderson and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with categories.
We measure a manager's risk-taking incentives as the total sensitivity of the manager's debt, stock, and option holdings to firm volatility. We compare this measure to the option vega and to relative measures used by the prior literature. Vega does not capture risk-taking incentives from managers' stock and debt holdings and does not reflect the fact that employee options are warrants. The relative measures do not incorporate the sensitivity of options to volatility. Our new measure explains risk choices better than vega and the relative measures, and should be useful for future research on managers' risk choices.
Risk Taking
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Author : Zur Shapira
language : en
Publisher: Russell Sage Foundation
Release Date : 1995-01-25
Risk Taking written by Zur Shapira and has been published by Russell Sage Foundation this book supported file pdf, txt, epub, kindle and other format this book has been release on 1995-01-25 with Business & Economics categories.
Classical economic theory assumes that people in risk situations follow a course of action based on a rational, consistent assessment of likely outcomes. But as Zur Shapira demonstrates in Risk Taking, corporate managers consistently stray from the prescribed path into far more subjective territory. Risk Taking offers a critical assessment of the relationship between theory and action in managerial decision making. Shapira offers a definitive account of the classical conception of risky decision making, which derives behavioral prescriptions from a calculation of both the value and the likelihood of possible outcomes. He then demonstrates how theories in this vein have been historically at odds with empirical observations. Risk Taking reports the results of an extensive survey of seven hundred managers that probed their attitudes and beliefs about risk and examined how they had actually made decisions in the face of uncertainty. The picture that emerges is of a dynamic, flexible process in which each manager's personal expertise and perceptions play profound roles. Managerial strategies are continually modified to suit changing circumstances. Rather than formulating probability estimates, executives create potential scenarios based not only on the possible outcomes but also on the many arbitrary factors inherent in their own situations. As Shapira notes, risk taking propensities vary among managers, and the need to maintain control and avoid particularly dangerous results exercises a powerful influence. Shapira also examines the impact of organizational structure, long-term management objectives, and incentives on decision making. With perceptive observations of the cognitive, emotional, and organizational dimensions of corporate decision making, Risk Taking propels the study of managerial risk behavior into new directions. This volume signals the way toward improving managerial decision making by revealing the need for more inclusive choice models that augment classical theory with vital behavioral observations.
Corporate Governance And Managerial Risk Taking
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Author : Kose John
language : en
Publisher:
Release Date : 2005
Corporate Governance And Managerial Risk Taking written by Kose John and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2005 with categories.
We study how the investor protection environment affects corporate managers' incentives to take value-enhancing risks. In our model, the manager chooses higher perk consumption when investor protection is low. Since perks represent a priority claim held by the manager, lower investor protection leads the manager to implement a sub-optimally conservative investment policy, effectively aligning her risk-taking incentives with those of the debt holders. By the same token, higher investor protection is associated with riskier investment policy and faster firm growth. We test these predictions in a large Global Vantage panel. We find strong empirical confirmation that corporate risk-taking and firm growth rates are positively related to the quality of investor protection.
Credit Ratings And Ceo Risk Taking Incentives
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Author : Yu Flora Kuang
language : en
Publisher:
Release Date : 2017
Credit Ratings And Ceo Risk Taking Incentives written by Yu Flora Kuang and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with categories.
This study examines the sophistication of rating agencies in incorporating managerial risk-taking incentives into their credit risk evaluation. We measure risk-taking incentives using two proxies: the sensitivity of managerial wealth to stock return volatility (vega) and the sensitivity of managerial wealth to stock price (delta). We find that rating agencies impound managerial risk-taking incentives in their credit risk assessments. Assuming other things equal, a one standard deviation increase in vega (delta) will lead to an approximately one-notch (two-notch) rating downgrade. In addition, we evaluate the significance of credit ratings in the design of CEO compensation. Our findings suggest that rating-troubled firms will gear down managerial incentives of risk-seeking. In particular, other things equal, a rating downgrade to the lower edge of the investment category (i.e., BBB-) in the immediate prior year will bring about an approximately 51 percent reduction of vega incentive from options newly granted to the CEO in the current year. However, we find no evidence that firms' rating concerns significantly affect delta.