Managerial incentives to take asset risk

Abstract

We argue that incentives to take equity risk ("equity incentives") only partially capture incentives to take asset risk ("asset incentives"). This is because leverage, while central to the theory of risk-shifting, is not explicitly considered by equity incentives. Employing measures of asset incentives that account for leverage, we find that asset risk-taking incentives can be large compared to incentives to increase firm value. Moreover, stock holdings can induce substantial risk-taking incentives, qualifying common beliefs regarding the central role of stock options. Finally, asset incentives help explain asset risk-taking of U.S. financial institutions before the 2007/08 crisis.

Management insulation and bank failures

“…Similarly, Adams (2012) and Minton, Taillard, and Williamson (2014) find a positive relation between board independence and bank bailouts (as a proxy for poor performance); see also Erkens, Hung, and Matos (2012) and Chesney, Stromberg, and Wagner (2019) for similar evidence. We use our index to revisit these findings from a different angle, provide some new complementary evidence, and dig deeper into the mechanisms.…”

The impact of the digital economy on enterprise innovation behavior: Based on CiteSpace knowledge graph analysis

“…Enterprise innovation has been a hot topic in academia in recent years, and it is the core element of enterprise dynamic growth and economic growth. In the past 5 years, there has been literature focusing on the significance of managerial characteristics and behavior to enterprises’ innovation and development ( Chesney et al, 2020 ; Gao et al, 2021 ), but these are mainly limited to endogenous self-selection behavior.…”

CEO incentives and bank risk over the business cycle

“…Chen et al (2006) and DeYoung et al (2013) show that higher pay-for-risk incentives are associated with higher bank risk. Similarly, Chesney et al (2016) finds a positive link between bankers' asset-based risk-taking incentives and write-downs during the crisis; they also show that this relationship disappears when they use equity-based risk-taking incentives. Acharya et al (2014) and Ellul and Yerramilli (2013) also find CEO vega to be an insignificant determinant of bank risk.…”