Value Risk Tradeoffs And Managerial Incentives
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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.
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.
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.
Firm Value And Managerial Incentives
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Author : Michel Habib
language : en
Publisher:
Release Date : 2000
Firm Value And Managerial Incentives written by Michel Habib and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2000 with Business enterprises categories.
Uncertainty Risk And Incentives
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Author :
language : en
Publisher:
Release Date : 2013
Uncertainty Risk And Incentives written by and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013 with Risk categories.
"Uncertainty has qualitatively different implications than risk in studying executive incentives. The authors study the interplay between profitability uncertainty and moral hazard, where profitability is multiplicative with managerial effort. Investors who face greater uncertainty desire faster learning, and consequently offer higher managerial incentives to induce higher effort from the manager. In contrast to the standard negative risk-incentive trade-off this 'learning-by-doing' effect generates a positive relation between probability uncertainty and incentives. They document empirical support for this prediction."--Abstract.
Enterprise Risk Management
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Author : David L Olson
language : en
Publisher: World Scientific Publishing Company
Release Date : 2015-01-21
Enterprise Risk Management written by David L Olson and has been published by World Scientific Publishing Company this book supported file pdf, txt, epub, kindle and other format this book has been release on 2015-01-21 with Business & Economics categories.
Risk is inherent in business. Without risk, there would be no motivation to conduct business. But a key principle is that organizations should accept risks that they are competent enough to deal with, and “outsource” other risks to those who are more competent to deal with them (such as insurance companies). Enterprise Risk Management (2nd Edition) approaches enterprise risk management from the perspectives of accounting, supply chains, and disaster management, in addition to the core perspective of finance. While the first edition included the perspective of information systems, the second edition views this as part of supply chain management or else focused on technological specifics. It discusses analytical tools available to assess risk, such as balanced scorecards, risk matrices, multiple criteria analysis, simulation, data envelopment analysis, and financial risk measures.
Two Essays On Managerial Risk Seeking Activities And Compensation Contracts
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Author : Chang Mo Kang
language : en
Publisher:
Release Date : 2014
Two Essays On Managerial Risk Seeking Activities And Compensation Contracts written by Chang Mo Kang 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 dissertation examines how the structures of compensation for executives and directors are affected by the possibility that managers can influence the risk of a firm's cash flows. In chapter 1, I consider a moral hazard model which shows that a strong pay-for-performance sensitivity in managerial compensation may deteriorate shareholder value when shareholders cannot monitor managerial risk-seeking activities. Intuitively, while high-powered managerial compensation provides the manager with incentives to increase the firm's value by exerting effort, it also creates managerial incentive to engage in (unproductive) risk-seeking activities. To test this prediction, I consider a regulatory change that makes it more difficult for managers to conceal information about the (speculative) use of derivative instruments. Specifically, I examine how the structures of compensation for executives and managers are affected by the adoption of a new accounting standard, the Statement of Financial Accounting Standard No. 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) which mandates the fair value accounting for derivative holdings. Consistent with the model prediction, I find that relative to other firms, derivative users (firms that traded derivatives before adopting FAS 133) increase the pay-for-performance sensitivity of CEO/CFO compensation. In Chapter 2, I extend the model by incorporating the realistic features that shareholders delegate to the (self-interested) board the tasks of monitoring managers and of setting their compensation contracts. My analysis shows that while high-powered board compensation induces the board to monitor the firm and to properly design managerial compensation, it also provides the board with incentives to misreport managerial risk-seeking activities and to engage in collusive behavior with the manager at the expense of shareholders. From these trade-offs, I develop a number of testable hypotheses and take them to the data. Consistent with the model predictions, I find that firms in which (i) managerial risk-seeking activities are more likely to occur (e.g., high R&D firms or banks) and (ii) board monitoring costs are likely to be lower (e.g., firms that have non-officer blockholders on the board) show weaker pay-for-performance sensitivity of board compensation and stronger pay-for-performance sensitivity of CEO compensation.
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.
The Other Side Of The Trade Off
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Author : John E. Core
language : en
Publisher:
Release Date : 2011
The Other Side Of The Trade Off written by John E. Core and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2011 with categories.
In contrast to a body of research starting with Demsetz and Lehn (1985) that predict and find a strong positive association between firm percent return variance and incentives, Aggarwal and Samwick (1999) predict and find a strong negative association between firm dollar return variance and incentives. A key assumption of Aggarwal and Samwick's analysis is that firm risk is the sole determinant of the pay-performance sensitivity, and that expected dollar return variance (the product of expected percent return variance and firm market value) is the correct proxy for risk. We demonstrate that dollar return variance is a noisy measure of firm market value and argue that Aamp;S re-documents a size effect that is already well-known from prior literature. Because dollar return variance is shown to be a noisy proxy for firm size, the Aamp;S empirical specification does not include an appropriate proxy for firm risk. The data consistently show that it is important to examine market value and percent return variance as separate determinants of the effects of size and risk on CEO incentives, as is done in the managerial ownership literature. In a model of CEO incentives that includes market value and risk as separate explanatory variables, we find that, contrary to the results in Aamp;S, percent return variance is positively associated with incentives. The Aamp;S empirical work cannot be interpreted as evidence of a negative relation between risk and incentives.
Managerial Incentives And Value Creation
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Author : Phillip Leslie
language : en
Publisher:
Release Date : 2008
Managerial Incentives And Value Creation written by Phillip Leslie and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2008 with Incentives in industry categories.
We analyze the differences between companies owned by private equity (PE) investors and similar public companies. We document that PE-owned companies use much stronger incentives for their top executives and have substantially higher debt levels. However, we find little evidence that PE-owned firms outperform public firms in profitability or operational efficiency. We also show that the compensation and debt differences between PE-owned companies and public companies disappear over a very short period (one to two years) after the PE-owned firm goes public. Our results raise questions about whether and how PE firms and the incentives they put in place create value.