Managerial Incentives to Take Asset Risk

Swiss Finance Institute Research Paper No. 10-18

Forthcoming, Journal of Corporate Finance

67 Pages Posted: 25 Apr 2010 Last revised: 20 Oct 2020

See all articles by Marc Chesney

Marc Chesney

University of Zurich - Department of Banking and Finance

Jacob Stromberg

Swiss Finance Institute

Alexander F. Wagner

University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swiss Finance Institute

Vincent Wolff

University of Zurich - Department of Banking and Finance

Date Written: October 16, 2020

Abstract

We argue that incentives to take equity risk ("equity incentives") only partially capture incentives to take asset risk ("asset incentives"). This is because leverage, while central to the theory of risk shifting, is not explicitly considered by equity incentives. Employing measures of asset incentives that account for leverage, we find that asset risk-taking incentives can be large compared to incentives to increase firm value. Stock holdings can induce substantial risk-taking incentives, contrary to the assumption that only stock options drive risk-taking. Finally, asset incentives help explain asset risk-taking of U.S. financial institutions before the 2007/08 crisis.

Keywords: Asset risk-taking; compound options; executive compensation; financial crisis; managerial incentives; risk-shifting; write-downs

JEL Classification: G01, G28, G34

Suggested Citation

Chesney, Marc and Stromberg, Jacob and Wagner, Alexander F. and Wolff, Vincent, Managerial Incentives to Take Asset Risk (October 16, 2020). Swiss Finance Institute Research Paper No. 10-18, Forthcoming, Journal of Corporate Finance, Available at SSRN: https://ssrn.com/abstract=1595343 or http://dx.doi.org/10.2139/ssrn.1595343

Marc Chesney

University of Zurich - Department of Banking and Finance ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

HOME PAGE: http://https://www.bf.uzh.ch/en/persons/chesney-marc

Jacob Stromberg

Swiss Finance Institute ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Alexander F. Wagner (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland
+41 44 634 3963 (Phone)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Swiss Finance Institute ( email )

Switzerland

HOME PAGE: http://www.alex-wagner.com

Vincent Wolff

University of Zurich - Department of Banking and Finance ( email )

Plattenstr 32
Zurich, 8032
Switzerland

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