Managerial incentives for risk-taking and internal capital allocation

Lorenzo Casavecchia*, Ja Young Suh

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)428-461
Number of pages34
JournalAustralian Journal of Management
Volume42
Issue number3
DOIs
Publication statusPublished - 1 Aug 2017

Keywords

  • Equity-based compensation
  • internal capital allocation
  • risk-taking

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