Managerial Incentives, Risk Aversion and Corporate Policy Decisions

60 Pages Posted: 19 Apr 2016

See all articles by Scott McKnight

Scott McKnight

University of Otago - Department of Accountancy and Finance

Helen Roberts

University of Otago - Department of Accountancy and Finance

Date Written: April 18, 2016

Abstract

We provide new evidence that equity incentives can have perverse effects on firm value. Conditioning the relationship between chief executive officer (CEO) incentives and the risk exposure generated by corporate policy decisions on how risk is expected to affect firm value, we find that delta encourages value-maximising investment and firm focus policy decisions, but may lead to sub-optimal financing decisions. When the goal of value-maximisation conflicts with the CEO’s propensity to avoid risk, the incentive effect of delta partially offsets risk aversion. We show that while CEO incentives affect corporate policy, the firm’s optimal policy also influences the compensation contract.

Keywords: Managerial Incentives, Risk Aversion, Delta-Risk Relationship, Corporate Policy Decisions

JEL Classification: G31, G32, G34, J33

Suggested Citation

McKnight, Scott and Roberts, Helen, Managerial Incentives, Risk Aversion and Corporate Policy Decisions (April 18, 2016). Available at SSRN: https://ssrn.com/abstract=2766801 or http://dx.doi.org/10.2139/ssrn.2766801

Scott McKnight

University of Otago - Department of Accountancy and Finance ( email )

PO Box 56
Dunedin, 9054
New Zealand

Helen Roberts (Contact Author)

University of Otago - Department of Accountancy and Finance ( email )

PO Box 56
Dunedin, 9054
New Zealand
6434798072 (Phone)
6434798171 (Fax)

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