TY - JOUR
T1 - Managerial risk incentives and a firm’s financing policy
AU - Karpavičius, Sigitas
AU - Yu, Fan
PY - 2019/3
Y1 - 2019/3
N2 - This paper provides a theoretical explanation for how risk preferences of a firm’s manager impact a firm’s optimal financing policy and shareholder value. The developed model implies that firms in growing industries are more valuable if they are run by more risk-seeking managers. Similarly, firms operating in declining industries should be run by less risk-seeking managers. Given that a firm’s optimal assets do not depend on the growth opportunities, and that debt is the difference between assets and equity, the model implies that there is a negative (positive) correlation between the riskiness of CEOs’ compensation packages and firms’ financial leverage ratios for firms in growing (declining) industries. This prediction is in stark contrast to economic intuition and prior literature in that less risk aversion normally should increase risk-taking. The empirical analysis generally supports all the model’s implications except those related to firms operating in declining industries.
AB - This paper provides a theoretical explanation for how risk preferences of a firm’s manager impact a firm’s optimal financing policy and shareholder value. The developed model implies that firms in growing industries are more valuable if they are run by more risk-seeking managers. Similarly, firms operating in declining industries should be run by less risk-seeking managers. Given that a firm’s optimal assets do not depend on the growth opportunities, and that debt is the difference between assets and equity, the model implies that there is a negative (positive) correlation between the riskiness of CEOs’ compensation packages and firms’ financial leverage ratios for firms in growing (declining) industries. This prediction is in stark contrast to economic intuition and prior literature in that less risk aversion normally should increase risk-taking. The empirical analysis generally supports all the model’s implications except those related to firms operating in declining industries.
KW - Capital structure
KW - Risk preferences
KW - Growth opportunities
KW - Firm value
UR - http://www.scopus.com/inward/record.url?scp=85060717201&partnerID=8YFLogxK
U2 - 10.1016/j.jbankfin.2019.01.013
DO - 10.1016/j.jbankfin.2019.01.013
M3 - Article
SN - 0378-4266
VL - 100
SP - 167
EP - 181
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
ER -