The relationship between managerial attributes and firm risk-taking

Abstract

PurposeThe main objective of the paper is to examine the relationship between managerial attributes (e.g. managerial entrenchment, managerial myopia and managerial overconfidence) and firm risk-taking on the Tehran Stock Exchange (TSE).Design/methodology/approachThe study’s sample comprises 150 companies listed on the TSE from 2011 to 2017. Risk-taking is calculated as the standard deviation (SD) of stock return. Explanatory factor analysis was performed to calculate the weight of each of the five variables managerial ownership, board independence, chief executive officer (CEO) tenure, board compensation and CEO duality as a proxy for managerial entrenchment. The study by Anderson and Hsiao (1982) was also used to calculate managerial myopia, and the study by Schrand and Zechman (2012) was used to calculate managerial overconfidence.FindingsThe results indicate that the effect of managerial entrenchment and managerial myopia on risk-taking of listed firms on the TSE is positive and significant, implying that an increase in CEO entrenchment is likely to give rise to risk-taking. The authors conjecture that this finding could be due to the investment projects impairing the firm performance in the long run. Furthermore, the effect of managerial overconfidence on listed firms' risk-taking on the TSE is significantly negative. Since overconfidence is one of the traits of narcissism and corporate managers tend to be encouraged and admired, it is implied that they tend to make efficient and low-risk investments that ultimately reduce the firm risk-taking.Originality/valueSeveral theoretical studies show that managerial behavior is a determining factor in the economy. One of the reasons which justify the originality of this study is the context and institutional environment. Undoubtedly, managerial behavior (e.g. managerial entrenchment, managerial myopia and managerial overconfidence) is expected to have some significant variations in developing countries compared to prevailing in developed countries, particularly in the Iranian stock market the economic sanctions. Furthermore, due to the direct impact of individuals' psychological and behavioral characteristics on their decisions and the effect of companies' risk-taking on increasing and decreasing shareholders and companies' wealth, this research is essential. Given the function of designed behavioral criteria for assessing risk-taking behaviors, the relationship between managerial attributes and firms' risk-taking is still unclear and investigated in this study.

Stakeholder interest to mitigate the agency problem in enterprise innovation and the moderating effect of ownership concentration and financial constraints

“…Furthermore, an increase in managerial ownership because of equity incentives might induce management entrenchment, which could be detrimental to company performance or information quality (e.g. Salehi et al, 2021a; Seifzadeh et al, 2021). Therefore, the management entrenchment effect would be a worthwhile research direction as well.…”

“…so that management and shareholder interests converge because of corresponding incentives). Specifically, Salehi, Arianpoor, and Naghshbandi (2021) indicated that managers in shorter tenures tend to concentrate on early return investments, which are different from the goals of shareholders. Likewise, Salehi, Adibian, et al (2021) showed that CEO tenure and corporate governance components have significant effects on agency costs.…”

Corporate characteristics, audit quality and managerial entrenchment during the COVID-19 crisis: evidence from an emerging country

“…, 2020). From agency perspectives, previous studies argued that some corporate characteristics foster/hinder ME (Salehi et al. , 2021a, b, c).…”

“…A growing body of literature has been examined empirically the relation between manager's entrenchment and firm characteristics with mixed findings (Salehi et al. , 2021a, b, c).…”

“…However, the results are still contradictory and inconclusive (Nazaridavaji and Khoramabad, 2021). Particularly, firm performance level is showed as one of key factors causing management entrenchment (Salehi et al. , 2021a, b, c).…”