The Effect of Managerial Incentives to Bear Risk on Corporate Capital Structure and R&D Investment

Posted: 1 Jul 2003

See all articles by Jouahn Nam

Jouahn Nam

Pace University - Lubin School of Business

Richard E. Ottoo

Pace University - Lubin School of Business

John Harris Thornton

Kent State University

Abstract

In this study we use estimates of the sensitivities of managers' portfolios to stock return volatility and stock price to directly test the relationship between managerial incentives to bear risk and two important corporate decisions. We find that as the sensitivity of managers' stock option portfolios to stock return volatility increases firms tend to choose higher debt ratios and make higher levels of R&D investment. These results are even stronger in a sub sample of firms with relatively low outside monitoring. For these firms managerial incentives to bear risk play a particularly pivotal role in determining leverage and R&D investment.

Suggested Citation

Nam, Jouahn and Ottoo, Richard E. and Thornton, John Harris, The Effect of Managerial Incentives to Bear Risk on Corporate Capital Structure and R&D Investment. Financial Review, Vol. 38, No. 1, February 2003. Available at SSRN: https://ssrn.com/abstract=344060

Jouahn Nam

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States
212-346-1818 (Phone)
212-346-1573 (Fax)

Richard E. Ottoo

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States
212-618-6526 (Phone)
212-618-6410 (Fax)

John Harris Thornton (Contact Author)

Kent State University ( email )

College of Business Administration
P.O. Box 5190
Kent, OH 44242-0001
United States
330-672-1214 (Phone)
330-672-9806 (Fax)

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