Does economic policy uncertainty influence executive risk-taking incentives?

Chatjuthamard, Pattanaporn; Wongboonsin, Patcharawalai; Kongsompong, Kritika; Jiraporn, Pornsit

doi:10.1016/j.frl.2019.101385

Cited by 60 publications

(40 citation statements)

References 15 publications

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“…This is an important study that links executive risk-taking incentives to corporate governance using a quasi-natural experiment [1]. Chatjuthamard et al (2020b) explore the effect of economic policy uncertainty on executive risk-taking incentives and demonstrate that firms raise managerial risk-taking incentives when experiencing more economic policy uncertainty. This is because more uncertainty exacerbates managerial risk aversion, making stronger risk-taking incentives necessary.…”

Section: Theoretical Framework and Literature Reviewmentioning

confidence: 99%

“…Our primary database is COMPUSTAT, which provides data both for firm characteristics and for executive stock options for companies in the USA. Consistent with prior studies, option’s vega is used to represent executive risk-taking incentives (Guay, 1999; Coles et al , 2006; Chava and Purnanandam, 2010; Croci et al , 2017; Chakrabarty et al , 2017; Ongsakul and Jiraporn, 2019; Chatjuthamard et al , 2020b). Vega represents the sensitivity of the executive’s wealth to stock return volatility.…”

Section: Sample Construction and Variable Descriptionmentioning

confidence: 99%

“…The results of our study make important contributions to the literature. First, we contribute to the literature on executive risk-taking (Guay, 1999; Coles et al , 2006; Chava and Purnanandam, 2010; Croci et al , 2017; Chakrabarty et al , 2017; Ongsakul and Jiraporn, 2019; Chatjuthamard et al , 2020b). To the best of our knowledge, our study is the first to show that takeover susceptibility is one of the crucial determinants of managerial risk-taking incentives.…”

Section: Introductionmentioning

confidence: 99%

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Does the market for corporate control influence executive risk-taking incentives? Evidence from takeover vulnerability

Ongsakul

Chatjuthamard

Jiraporn

et al. 2020

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Purpose This study aims to investigate the role of the market for corporate control as an external governance mechanism and its effect on executive risk-taking incentives. Managers tend to be risk-averse as they are more exposed to idiosyncratic risk, resulting in sub-optimal risk-taking that does not maximize shareholders’ wealth. The takeover market alleviates this problem, inducing managers to take more risk. Therefore, risk-taking incentives inside the firm are less powerful when the outside takeover market is more active. Design/methodology/approach Exploiting a novel measure of takeover vulnerability recently constructed by Cain et al. (2017), the authors explore how takeover vulnerability influences executive risk-taking incentives. Using a large sample of US firms, the authors use fixed-effects regressions, propensity score matching and instrumental variable analysis. Findings Consistent with this study’s hypothesis, a more active takeover market results in less powerful risk-taking incentives. Specifically, a rise in takeover vulnerability by one standard deviation diminishes executive risk-taking incentives by 22.39%, which is an economically meaningful magnitude. Originality/value To the best of the authors’ knowledge, this study is the first to explore the effect of the takeover market on managerial risk-taking incentives, using a novel measure of takeover susceptibility. The authors’ measure of takeover vulnerability is considerably less susceptible to endogeneity, enabling the authors to draw causal inferences with more confidence.

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Section: Theoretical Framework and Literature Reviewmentioning

confidence: 99%

Section: Sample Construction and Variable Descriptionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Does the market for corporate control influence executive risk-taking incentives? Evidence from takeover vulnerability

Ongsakul

Chatjuthamard

Jiraporn

et al. 2020

Self Cite

View full text Add to dashboard Cite

show abstract

“…Our primary database is COMPUSTAT, which contains information both about firm characteristics and executive stock options in the United States. Consistent with previous research, we use options’ vega to measure executive risk-taking incentives [ 10 , 13 , 15 , 17 , 18 , 45 , 46 ]. Vega reflects the executive’s wealth’s sensitivity to stock return volatility.…”

Section: Sample Construction and Data Descriptionmentioning

confidence: 99%

“…Based on the literature in this area, we include a number of control variables that may influence vega [ 13 , 15 ]. More specifically, we include board size (the number of directors), board independence (the percentage of independent directors), firm size (Ln of total assets), profitability (EBIT/total assets), leverage (total debt/total assets), investments (capital expenditures/total assets), intangible assets (R&D/total assets and advertising expense/total assets), cash holdings (cash holdings/total assets), asset tangibility (fixed assets/total assets), discretionary spending (SG&A expense/total assets), dividend payouts (total dividends/total assets), and delta (sensitivity of the executive’s wealth to stock returns).…”

Section: Sample Construction and Data Descriptionmentioning

confidence: 99%

Does board gender diversity weaken or strengthen executive risk-taking incentives?

2021

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We investigate the effect of board gender diversity on managerial risk-taking incentives. Our results demonstrate that companies with stronger board gender diversity provide more powerful executive risk-taking incentives. It appears that female directors’ risk aversion exacerbates managers’ risk aversion, resulting in a sub-optimal level of risk-taking. To offset this tendency for too little risk, companies are induced to provide stronger risk-taking incentives. Specifically, an increase in board gender diversity by one standard deviation raises vega by 10.3%. Further analysis corroborates the results, including propensity score matching, entropy balancing, and an instrumental-variable analysis. Endogeneity appears to be unlikely, suggesting that female directors are not merely associated with, but probably bring about stronger risk-taking incentives.

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Corporate risk‐taking, economic policy uncertainty and ESG performance: International evidence

Ooi,

Lu,

Zulkafli

2024

Bus Strat Dev

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Corporate risk‐taking, which aims to maximize shareholders' profits, has raised concerns regarding potential conflicts with Environmental, social and governance (ESG) investments. We address this gap by investigating the relationship between corporate risk‐taking and ESG performance using an international sample from 20 economies spanning 2000 to 2022, while carefully accounting for endogeneity based on GMM, Heckman sample selection bias and simultaneous equations. Our findings reveal a significantly negative relationship, suggesting a trade‐off between the two, which aligns with the conservation of resources (COR) theory. Furthermore, the COR theory is integrated with agency theory and stakeholder theory when examining subsamples of high and low corporate governance scores. Additionally, we find that economic policy uncertainty (EPU) positively moderates this relationship, particularly in high‐income economies and for large firms. This effect is evident during the post‐2008 subprime crisis period but dissipates in the post‐COVID‐19 era. The overall findings have several important theoretical and practical implications for the literature.

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Does economic policy uncertainty influence executive risk-taking incentives?

Cited by 60 publications

References 15 publications

Does the market for corporate control influence executive risk-taking incentives? Evidence from takeover vulnerability

Does the market for corporate control influence executive risk-taking incentives? Evidence from takeover vulnerability

Does board gender diversity weaken or strengthen executive risk-taking incentives?

Corporate risk‐taking, economic policy uncertainty and ESG performance: International evidence

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