Abstract

http://ssrn.com/abstract=2465632
 


 



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


Todd A. Gormley


Washington University in St. Louis

David A. Matsa


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

July 20, 2016

Journal of Financial Economics (JFE), Forthcoming

Abstract:     
This article examines managers’ incentive to play it safe. We find that, after managers are insulated by the adoption of an antitakeover law, they take value-destroying actions that reduce their firms’ stock volatility and risk of distress. To illustrate one such action, we show that managers undertake diversifying acquisitions that target firms likely to reduce risk, have negative announcement returns, and are concentrated among firms with managers who gain the most from reducing risk. Our findings suggest that instruments typically used to motivate managers, such as greater financial leverage and larger ownership stakes, exacerbate risk-related agency challenges.

Number of Pages in PDF File: 68

Keywords: risk aversion, managerial preferences, agency conflicts, acquisitions

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


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Date posted: July 14, 2014 ; Last revised: July 21, 2016

Suggested Citation

Gormley, Todd A. and Matsa, David A., Playing It Safe? Managerial Preferences, Risk, and Agency Conflicts (July 20, 2016). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: http://ssrn.com/abstract=2465632 or http://dx.doi.org/10.2139/ssrn.2465632

Contact Information

Todd A. Gormley (Contact Author)
Washington University in St. Louis ( email )
One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
(314) 935-7171 (Phone)
HOME PAGE: http://www.gormley.info
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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