Abstract

http://ssrn.com/abstract=2465632
 


 



Playing it Safe? Managerial Preferences, Risk, and Agency Conflicts


Todd A. Gormley


University of Pennsylvania - The Wharton School

David A. Matsa


Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)

September 5, 2014


Abstract:     
This paper examines managers’ incentive to “play it safe” by taking value-destroying actions that reduce their firms’ risk of distress. We find that, after managers are insulated by the adoption of an antitakeover law, firms take on less risk. Stock volatility decreases, cash holdings increase, and diversifying acquisitions increase by more than a quarter relative to firms that operate in the same state and industry. The acquisitions target “cash cows,” have negative announcement returns, and are concentrated among firms with greater risk of distress and inside ownership. Our findings suggest that shareholders face governance challenges beyond motivating managerial effort, and that instruments typically used to motivate managers, like greater financial leverage and larger ownership stakes, intensify these challenges.

Number of Pages in PDF File: 54

Keywords: risk aversion, managerial preferences, agency conflicts

JEL Classification: D22, D81, G32, G34, K22

working papers series





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Date posted: July 14, 2014 ; Last revised: September 8, 2014

Suggested Citation

Gormley, Todd A. and Matsa, David A., Playing it Safe? Managerial Preferences, Risk, and Agency Conflicts (September 5, 2014). Available at SSRN: http://ssrn.com/abstract=2465632 or http://dx.doi.org/10.2139/ssrn.2465632

Contact Information

Todd A. Gormley (Contact Author)
University of Pennsylvania - The Wharton School ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
(314) 313-4330 (Phone)
HOME PAGE: http://apps.olin.wustl.edu/faculty/Gormley/

David A. Matsa
Northwestern University - Kellogg School of Management ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8337 (Phone)
847-491-5719 (Fax)
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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