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Corporate Governance and Managerial Risk-Taking: Theory and EvidenceKose JohnNew York University (NYU) - Department of Finance Lubomir P. LitovUniversity of Arizona - Department of Finance; University of Pennsylvania - Wharton Financial Institutions Center Bernard Yin YeungNUS Business School, National University of Singapore December 2004 Abstract: We study how the investor protection environment affects corporate managers' incentives to take value-enhancing risks. In our model, the manager chooses higher perk consumption when investor protection is low. Since perks represent a priority claim held by the manager, lower investor protection leads the manager to implement a sub-optimally conservative investment policy, effectively aligning her risk-taking incentives with those of the debt holders. By the same token, higher investor protection is associated with riskier investment policy and faster firm growth. We test these predictions in a large Global Vantage panel. We find strong empirical confirmation that corporate risk-taking and firm growth rates are positively related to the quality of investor protection.
Number of Pages in PDF File: 46 Keywords: Corporate Governance, Investor Protection, Managerial Incentives JEL Classification: G15, G31, G34 working papers seriesDate posted: December 30, 2004Suggested CitationContact Information
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