Managerial Incentives, Risk Aversion, and Debt
University of Cyprus - Department of Public & Business Administration
University of Manchester - Manchester Business School
August 1, 2012
Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
We investigate the risk choices of risk averse CEOs. Following recent theoretical work, we expect CEO risk aversion to be more pronounced in firms with high leverage, or high default probability. We find that the CEOs of these firms reduce firm risk, even in the presence of strong risk taking incentives. Our results are robust to controls for the sensitivity of CEO wealth to stock price changes, firm risk determinants, the endogenous feedback effects of firm risk on CEO incentives, unobserved firm and market effects, and debt governance. The impact of CEO risk aversion is economically significant.
Number of Pages in PDF File: 43
Keywords: Executive compensation, CEO incentives,Risk taking, Risky debt, Bankruptcy
JEL Classification: G32, G33, J33, J41working papers series
Date posted: July 5, 2011 ; Last revised: October 29, 2012
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