Corporate Governance and Managerial Risk Taking: Theory and Evidence

51 Pages Posted: 31 Oct 2008

See all articles by Bernard Yin Yeung

Bernard Yin Yeung

National University of Singapore - Business School

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business; University of Pennsylvania - Wharton Financial Institutions Center

Kose John

New York University (NYU) - Department of Finance

Multiple version iconThere are 5 versions of this paper

Date Written: 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 investmentpolicy, 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.

Keywords: Corporate Governance, Investor Protection, Managerial Incentives

Suggested Citation

Yeung, Bernard Yin and Litov, Lubomir P. and John, Kose, Corporate Governance and Managerial Risk Taking: Theory and Evidence (December 2004). NYU Working Paper No. EC-04-35, Available at SSRN: https://ssrn.com/abstract=1292618

Bernard Yin Yeung (Contact Author)

National University of Singapore - Business School ( email )

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BIZ 1 Level 6
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65 6779 1365 (Fax)

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business ( email )

307 West Brooks
Norman, OK 73019-4004
United States

University of Pennsylvania - Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

Kose John

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

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