Managerial Incentives, Risk Aversion and Corporate Policy Decisions
60 Pages Posted: 19 Apr 2016
Date Written: April 18, 2016
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: Suggested Citation