Investment, Idiosyncratic Risk, and Ownership

52 Pages Posted: 24 Dec 2008 Last revised: 20 Mar 2013

Date Written: November 1, 2011


High-powered incentives may induce higher managerial effort, but they also expose managers to idiosyncratic risk. If managers are risk averse, they might underinvest when firm-specific uncertainty increases, leading to suboptimal investment decisions from the perspective of well-diversified shareholders. We empirically document that when idiosyncratic risk rises, firm investment falls, and more so when managers own a larger fraction of the firm. This negative effect of managerial risk aversion on investment is mitigated if executives are compensated with options rather than with shares or if institutional investors form a large part of the shareholder base.

Keywords: Investment, idiosyncratic risk, managerial ownership

Suggested Citation

Papanikolaou, Dimitris and Panousi, Vasia, Investment, Idiosyncratic Risk, and Ownership (November 1, 2011). Journal of Finance, Vol. 67, No. 3, 2012. Available at SSRN: or

Dimitris Papanikolaou

Northwestern University - Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Vasia Panousi (Contact Author)

University of Montreal, Department of Economics ( email )

C.P. 6128 succursale Centre-ville
Montreal, Quebec H3C 3J7

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