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Managerial incentives to take asset risk


Chesney, Marc; Stromberg, Jacob; Wagner, Alexander; Wolff, Vincent Lars (2020). Managerial incentives to take asset risk. Journal of Corporate Finance, 65:101758.

Abstract

We argue that incentives to take equity risk (”equity incentives”) only partially capture incentives to take asset risk (“asset incentives”). This is because leverage, while central to the theory of risk-shifting, is not explicitly considered by equity incentives. Employing measures of asset incentives that account for leverage, we find that asset risk-taking incentives can be large compared to incentives to increase firm value. Stock holdings can induce substantial risk-taking incentives, contrary to the assumption that only stock options drive risk-taking. Finally, asset incentives help explain asset risk-taking of U.S. financial institutions before the 2007/08 crisis.

Abstract

We argue that incentives to take equity risk (”equity incentives”) only partially capture incentives to take asset risk (“asset incentives”). This is because leverage, while central to the theory of risk-shifting, is not explicitly considered by equity incentives. Employing measures of asset incentives that account for leverage, we find that asset risk-taking incentives can be large compared to incentives to increase firm value. Stock holdings can induce substantial risk-taking incentives, contrary to the assumption that only stock options drive risk-taking. Finally, asset incentives help explain asset risk-taking of U.S. financial institutions before the 2007/08 crisis.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Business and International Management
Social Sciences & Humanities > Finance
Social Sciences & Humanities > Economics and Econometrics
Social Sciences & Humanities > Strategy and Management
Language:English
Date:December 2020
Deposited On:03 Feb 2021 08:02
Last Modified:25 Feb 2021 15:38
Publisher:Elsevier
ISSN:0929-1199
OA Status:Closed
Publisher DOI:https://doi.org/10.1016/j.jcorpfin.2020.101758
Related URLs:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1595343 (Organisation)
https://www.sciencedirect.com/science/article/pii/S0929119920302029 (Publisher)
Other Identification Number:merlin-id:20011

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Embargo till: 2022-12-31