What Drives CEOs to Take on More Risk? Some Evidence from the Laboratory of REITs

16 Pages Posted: 21 Mar 2011

See all articles by Roland Fss

Roland Fss

affiliation not provided to SSRN

Nico B. Rottke

European Business School (EBS) Wiesbaden - Department Finance, Accounting & Real Estate

Joachim Zietz

EBS University, EBS Business School

Date Written: March 18, 2011

Abstract

Many have pointed to excessive risk-taking by the CEOs of financial firms as a contributor to the recent worldwide economic crisis. The same observers often blame questionable corporate governance structures and compensation practices for that risk-taking. But is this perception correct? And what is the relationship between CEO incentives and risk-taking outside of the financial industry, where the government guarantees provided by deposit insurance could have distorted incentives?. In an attempt to answer these questions, the authors analyze the relationship between CEO incentives and corporate risk-taking by 101 U.S. REITs during the period 2003 to 2007. Their main finding is that corporate risk-taking, as measured by the growth rate in corporate debt (the only measure of risk that is completely under the control of the CEO), is inversely related to CEO stock ownership that is, the larger the CEO's equity ownership stake, the slower the growth in debt financing and financial risk-taking. At the same time, the authors find that financial risk-taking is positively related to large cash bonuses for the CEOs and to situations in which the CEO is also chairman of the board of directors. Finally, the authors also report that CEOs who are relatively new to the job grow more slowly and borrow less, suggesting that boards of directors can temporarily contain risky expansion plans by the CEO. These results provide support for those corporate governance reformers who wish to cut cash bonus payments for CEOs in favor of long-term stock ownership.

Suggested Citation

Fss, Roland and Rottke, Nico B. and Zietz, Joachim, What Drives CEOs to Take on More Risk? Some Evidence from the Laboratory of REITs (March 18, 2011). Journal of Applied Corporate Finance, Vol. 23, Issue 1, pp. 92-105, 2011. Available at SSRN: https://ssrn.com/abstract=1790194 or http://dx.doi.org/10.1111/j.1745-6622.2011.00318.x

Roland Fss

affiliation not provided to SSRN

No Address Available

Nico B. Rottke (Contact Author)

European Business School (EBS) Wiesbaden - Department Finance, Accounting & Real Estate ( email )

Gustav-Stresemann-Ring 3
Wiesbaden, Hessen 65189
Germany
0611-36 018 931 (Phone)
0611-36 018 902 (Fax)

HOME PAGE: http://www.rem-institute.org

Joachim Zietz

EBS University, EBS Business School ( email )

Gustav-Stresemann-Ring 3
Wiesbaden, Hessen 65189
Germany

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