Corporate Governance and Managerial Risk Taking: Theory and Evidence

49 Pages Posted: 22 Mar 2005  

Kose John

New York University (NYU) - Department of Finance

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business; University of Pennsylvania - Wharton Financial Institutions Center

Bernard Yin Yeung

National University of Singapore - Business School

Multiple version iconThere are 5 versions of this paper

Date Written: March 15, 2005

Abstract

We study how the investor protection environment affects corporate managers' incentives to take value-enhancing risks. In our model, the manager chooses higher perk consumption when investor protection is low. Since perks represent a priority claim held by the manager, lower investor protection leads the manager to implement a sub-optimally conservative investment policy, effectively aligning her risk-taking incentives with those of the debt holders. By the same token, higher investor protection is associated with riskier investment policy and faster firm growth. We test these predictions in a large Global Vantage panel. We find strong empirical confirmation that corporate risk-taking and firm growth rates are positively related to the quality of investor protection.

Keywords: Corporate Governance, Investor Protection, Managerial Incentives.

JEL Classification: G15, G31, G34

Suggested Citation

John, Kose and Litov, Lubomir P. and Yeung, Bernard Yin, Corporate Governance and Managerial Risk Taking: Theory and Evidence (March 15, 2005). Available at SSRN: https://ssrn.com/abstract=687206 or http://dx.doi.org/10.2139/ssrn.687206

Kose John

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business ( email )

307 West Brooks
Norman, OK 73019-4004
United States

University of Pennsylvania - Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

Bernard Yin Yeung (Contact Author)

National University of Singapore - Business School ( email )

1 Business Link
Biz 2 Building Level 6
Singapore 117592
Singapore
65 6516 3075 (Phone)
65 6779 1365 (Fax)

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