2014
DOI: 10.1017/s0022109014000301
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Managerial Incentives, Risk Aversion, and Debt

Abstract: We investigate the risk choices of risk-averse CEOs. Following recent theoretical work, we expect CEO risk aversion to be more pronounced in firms with high leverage or high default probability. We find that the CEOs of these firms reduce firm risk, even in the presence of strong risk-taking incentives. Our results are robust to controls for the sensitivity of CEO wealth to stock price changes, firm risk determinants, the endogenous feedback effects of firm risk on CEO incentives, unobserved firm and market ef… Show more

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Cited by 73 publications
(49 citation statements)
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References 78 publications
(187 reference statements)
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“…However, the negative coefficients on log delta can be explained because risk-averse managers may pass up risk-increasing, positive net present value projects due to a lack of diversification (Guay, 1999). The significant and negative coefficients on the value of log vega are consistent with Milidonis and Stathopoulos (2014).…”
Section: Resultsmentioning
confidence: 86%
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“…However, the negative coefficients on log delta can be explained because risk-averse managers may pass up risk-increasing, positive net present value projects due to a lack of diversification (Guay, 1999). The significant and negative coefficients on the value of log vega are consistent with Milidonis and Stathopoulos (2014).…”
Section: Resultsmentioning
confidence: 86%
“…We also examine other factors that influence managerial risk‐taking behavior by including CEO compensation characteristics, firm characteristics, and firm governance characteristics as explanatory variables. Similar to the literature (Coles, Daniel, and Naveen, ; Milidonis and Stathopoulos, ), we use the lagged values of our main explanatory variables as a first step to address some of the potential causality concerns. To test our hypothesis, the primary regression model is specified as follows: Riski,t=β0+β1Relative Debti,t1+j=24βjCompensation Characteristicsi,t1 +j=514βjitalicFirm Characteristicsi,t+j=1517βjCEOGovernance Characteristicsi,.t +j=1823βjTimet+ϵi,t, …”
Section: Methodology and Variable Estimationmentioning
confidence: 99%
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“…Specifically the average job growth rate for 2012-2022 is "much faster than average" (26 percent vs. the U.S. average of 11 percent). Hence, career concerns do not seem as strong for actuaries as it is for the sample of executives examined by Milidonis and Stathopoulos (2014); however, OA could have more to lose than NOA, since the market for OA would be more competitive than the market for NOA.…”
Section: Managerial Compensation Incentivesmentioning
confidence: 99%
“…Guay () and Ross () show that the effectiveness of CEO equity compensation depends on CEO risk aversion. Although measuring CEO risk aversion is difficult, Milidonis and Stathopoulos () demonstrate conditions where higher firm‐level risk aversion can be identified, such as in firms with high probabilities of default. They find CEO option compensation reduces firm risk in firms with lower Altman z ‐score (high probability of default).…”
Section: Introductionmentioning
confidence: 99%