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)
July 13, 2015
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 unaffected 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, higher inside ownership, and younger CEOs. 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, exacerbate these challenges.
Number of Pages in PDF File: 62
Keywords: risk aversion, managerial preferences, agency conflicts, acquisitions
JEL Classification: D22, D81, G32, G34, K22
Date posted: July 14, 2014 ; Last revised: July 14, 2015
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