59 Pages Posted: 25 Apr 2010 Last revised: 14 Apr 2016
Date Written: April 12, 2016
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, only asset incentives explain asset risk-taking of U.S. financial institutions before the 2007/08 crisis.
Keywords: Executive compensation, Financial crisis, write-downs, corporate governance, managerial incentives, risk-taking
JEL Classification: G01, G28, G34
Suggested Citation: Suggested Citation
Chesney, Marc and Stromberg, Jacob and Wagner, Alexander F., Managerial Incentives to Take Asset Risk (April 12, 2016). 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
By Kevin Murphy