Playing It Safe? Managerial Preferences, Risk, and Agency Conflicts

68 Pages Posted: 14 Jul 2014 Last revised: 21 Jul 2016

See all articles by Todd A. Gormley

Todd A. Gormley

Washington University in St. Louis; European Corporate Governance Institute (ECGI)

David A. Matsa

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)

Date Written: July 20, 2016

Abstract

This article examines managers’ incentive to play it safe. We find that, after managers are insulated by the adoption of an antitakeover law, they take value-destroying actions that reduce their firms’ stock volatility and risk of distress. To illustrate one such action, we show that managers undertake diversifying acquisitions that target firms likely to reduce risk, have negative announcement returns, and are concentrated among firms with managers who gain the most from reducing risk. Our findings suggest that instruments typically used to motivate managers, such as greater financial leverage and larger ownership stakes, exacerbate risk-related agency challenges.

Keywords: risk aversion, managerial preferences, agency conflicts, acquisitions

JEL Classification: D22, D81, G32, G34, K22

Suggested Citation

Gormley, Todd A. and Matsa, David A., Playing It Safe? Managerial Preferences, Risk, and Agency Conflicts (July 20, 2016). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2465632 or http://dx.doi.org/10.2139/ssrn.2465632

Todd A. Gormley (Contact Author)

Washington University in St. Louis ( email )

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European Corporate Governance Institute (ECGI) ( email )

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David A. Matsa

Northwestern University - Kellogg School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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