Does Economic Policy Uncertainty Influence Executive Risk-Taking Incentives?

20 Pages Posted: 12 Dec 2019

See all articles by Pattanaporn Chatjuthamard

Pattanaporn Chatjuthamard

Sasin GIBA

Patcharawalai Wongboonsin

Chulalongkorn University

Kritika Kongsompong

Sasin GIBA; Sasin GIBA

Pornsit Jiraporn

Pennsylvania State University - School of Graduate Professional Studies (SGPS)

Date Written: November 25, 2019

Abstract

We explore the effect of economic policy uncertainty (EPU) on managerial risk-taking incentives. Our analysis shows that EPU leads to more powerful risk-taking incentives. A rise in EPU by one standard deviation raises vega by 18.88%. Economic uncertainty, coupled with their own inherent risk aversion, motivates managers to be extra cautious during uncertain times, resulting in sub-optimal risk-taking. To offset this tendency for too little risk, firms provide more powerful risk-taking incentives to induce managers to be more aggressive. Further analysis confirms the results, including an instrumental-variable analysis, random-effects analysis, propensity score matching, and using two alternative measures of uncertainty.

Keywords: economic policy uncertainty, managerial risk-taking, risk-taking incentives, instrumental variable

JEL Classification: E66, D22, M22

Suggested Citation

Chatjuthamard, Pattanaporn and Wongboonsin, Patcharawalai and Kongsompong, Kritika and Jiraporn, Pornsit, Does Economic Policy Uncertainty Influence Executive Risk-Taking Incentives? (November 25, 2019). Available at SSRN: https://ssrn.com/abstract=3493311 or http://dx.doi.org/10.2139/ssrn.3493311

Pattanaporn Chatjuthamard

Sasin GIBA ( email )

Bangkok
Thailand

Patcharawalai Wongboonsin

Chulalongkorn University ( email )

Bangkok 10330
Thailand

Kritika Kongsompong

Sasin GIBA ( email )

Bangkok 10330
Thailand

Sasin GIBA ( email )

Bangkok 10330
Thailand

Pornsit Jiraporn (Contact Author)

Pennsylvania State University - School of Graduate Professional Studies (SGPS) ( email )

30 E. Swedesford Road
Malvern, PA 19355
United States
(484) 753-3655 (Phone)

HOME PAGE: http://www.personal.psu.edu/pxj11/index1.html

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