Value-Risk Tradeoffs and Managerial Incentives

59 Pages Posted: 4 Nov 2015 Last revised: 5 May 2018

See all articles by David Tsui

David Tsui

University of Southern California - Marshall School of Business

Date Written: April 23, 2018


I examine the relation between shareholder value and managerial risk-taking and how this value-risk tradeoff influences managers’ incentive compensation packages. I find that shareholder value increases with risk and therefore managerial risk aversion creates potential agency conflicts between managers and shareholders. I also find that firms provide managers with stronger risk-taking incentives when value-risk tradeoffs are steeper (i.e., the marginal benefit of risk-taking is greater) and therefore potential risk-related agency costs are more severe, particularly when shareholder value increases with idiosyncratic (rather than systematic) risk and managers are more risk-averse. Collectively, these results suggest that firms deliberately provide managers with risk-taking incentives to address risk-related agency conflicts and these incentives do not encourage widespread “excessive” risk-taking. I also provide an explanation for conflicting prior evidence on the incentive effects of managers’ stock holdings by showing that these incentives vary based on firms’ value-risk tradeoffs.

Keywords: executive compensation, managerial incentives, risk-taking incentives, risk-return tradeoffs, value-risk tradeoffs

JEL Classification: G32, G34, J33

Suggested Citation

Tsui, David, Value-Risk Tradeoffs and Managerial Incentives (April 23, 2018). Available at SSRN: or

David Tsui (Contact Author)

University of Southern California - Marshall School of Business ( email )

3660 Trousdale Parkway
Los Angeles, CA 90089
United States

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