Managerial Incentives to Take Asset Risk
University of Zurich - Swiss Banking Institute (ISB); Swiss Finance Institute
Swiss Finance Institute
Alexander F. Wagner
University of Zurich - Department of Banking and Finance; Swiss Finance Institute; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
September 5, 2012
Swiss Finance Institute Research Paper No. 10-18
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 nd that asset risk-taking incentives can be large compared to incentives to increase rm value. Moreover, stock holdings can induce substantial risk-taking incentives, qualifying common beliefs regarding the central role of stock options. Finally, only asset incentives explain asset risk-taking of U.S. nancial institutions before the 2007/08 crisis.
Number of Pages in PDF File: 59
Keywords: Executive compensation, nancial crisis, write-downs, corporate governance, managerial incentives, risk-taking
JEL Classification: G01, G28, G34
Date posted: April 25, 2010 ; Last revised: September 5, 2012
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