Do Risk-Taking Incentives Induce CEOs to Invest? Evidence from Acquisitions

52 Pages Posted: 22 May 2013 Last revised: 25 Mar 2015

See all articles by Ettore Croci

Ettore Croci

Catholic University of the Sacred Heart of Milan

Dimitris Petmezas

Durham University Business School

Date Written: March 1, 2015

Abstract

This paper examines the effect of risk-taking incentives on acquisition investments. We find that CEOs with risk-taking incentives are more likely to invest in acquisitions. Economically, an inter-quartile range increase in vega translates into an approximately 4.22% enhancement in acquisition investments, consistent with the theory that risk-taking incentives induce CEOs to undertake investments. Importantly, the positive relation between vega and acquisitions is confined only to non-overconfident CEOs subgroup. Further, corporate governance does not generally affect the association between vega and acquisition investments. Finally, vega is positively related to bidder announcement returns.

Keywords: Executive compensation, Managerial incentives, Risk-taking, Mergers and acquisitions, Overconfidence

JEL Classification: G34, J33, M12

Suggested Citation

Croci, Ettore and Petmezas, Dimitris, Do Risk-Taking Incentives Induce CEOs to Invest? Evidence from Acquisitions (March 1, 2015). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2267771 or http://dx.doi.org/10.2139/ssrn.2267771

Ettore Croci

Catholic University of the Sacred Heart of Milan ( email )

Largo Gemelli, 1
Via Necchi 9
Milan, MI 20123
Italy

Dimitris Petmezas (Contact Author)

Durham University Business School ( email )

Mill Hill Lane
Durham, DH1 3LB
United Kingdom

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