Journal of Financial Economics Vol. 79 No. 2 2006

Managerial incentives and risk-taking☆

Jeffrey L. Coles¹; N DANIEL²; Lalitha Naveen²

¹ Arizona State University · ² Georgia State University

Abstract

We provide empirical evidence of a strong causal relation between 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 managerial compensation scheme, we find that higher sensitivity of CEO wealth to stock volatility (vega) implements riskier policy choices, including relatively more investment in R&D, less investment in PPE, more focus, and higher leverage. We also find that riskier policy choices generally lead to compensation structures with higher vega and lower delta. Stock-return volatility has a positive effect on both vega and delta.

DOI

10.1016/j.jfineco.2004.09.004

Volume

79

Issue

2

Pages

431-468

Language

en

Sources

crossref openalex bibtex:phds-export.bib

Cite

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