Interest Rates and Managerial Risk Incentives: The Role of Institutional Investors. Evidence From the US

38 Pages Posted: 28 Feb 2019

See all articles by Paula Castro

Paula Castro

Universidad de León

Maria T. Tascón

Universidad de León

Francisco J. Castaño

Universidad de León

Borja Amor-Tapia

Universidad de León

Date Written: February 11, 2019

Abstract

This paper contributes to the literature by indicating how the effect of monetary policies, such as interest rates, the zero lower bound (ZLB) and differential volatility between long-term and short-term interest rates, impact the incentives of firms’ managers in the US in recent years and how the monitoring of institutional ownership influences these relations. Specifically, based on the agency problem between managers and creditors, a research framework is developed that incorporates different macroeconomic conditions to identify their influence on managers’ risk incentives. More than 11,000 industrial firms in US between 1994 and 2012 were examined, and the results indicate that certain macroeconomic conditions, such as low loan interest rates, the ZLB and monetary market stability, increase the managers’ risk incentives, proxied by the sensitivity of stock return volatility. Furthermore, we observe that low interest rates influence the managers’ incentives to intensify risk taking when firms have a higher proportion of “passive” institutional shareholders.

Keywords: Executive Compensation, Monetary Policies, Interest Rates, Managers’ Risk Incentives, Institutional Investors, ZLB Policy

JEL Classification: E41, E43, E51, M12, M52

Suggested Citation

Castro, Paula and Tascon, Maria Teresa and Castaño, Francisco Javier and Amor-Tapia, Borja, Interest Rates and Managerial Risk Incentives: The Role of Institutional Investors. Evidence From the US (February 11, 2019). Available at SSRN: https://ssrn.com/abstract=3332704 or http://dx.doi.org/10.2139/ssrn.3332704

Paula Castro (Contact Author)

Universidad de León ( email )

Leon, 24071
Spain

Maria Teresa Tascon

Universidad de León ( email )

Leon, 24071
Spain

Francisco Javier Castaño

Universidad de León ( email )

Spain

Borja Amor-Tapia

Universidad de León ( email )

Leon, 24071
Spain
(+34) 987291000 (Phone)

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