Managerial Incentives to Take Asset Risk

60 Pages Posted: 25 Apr 2010 Last revised: 23 Jan 2019

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

Date Written: January 19, 2019

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. Moreover, stock holdings can induce substantial risk-taking incentives, qualifying common beliefs regarding the central role of stock options.Finally, asset incentives help explain asset risk-taking of U.S. financial institutions before the 2007/08 crisis.

Keywords: Executive compensation, managerial incentives, risk-shifting, asset risk-taking, compound options, financial crisis, write-downs

JEL Classification: G01, G28, G34

Suggested Citation

Chesney, Marc and Stromberg, Jacob and Wagner, Alexander F., Managerial Incentives to Take Asset Risk (January 19, 2019). Swiss Finance Institute Research Paper No. 10-18. 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 ECARES ULB CP 114
B-1050 Brussels
Belgium

Swiss Finance Institute ( email )

Switzerland

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

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