It is commonly believed that managerial decisions regarding allocation of limited resources across various lines of business are critical to the value creation of a diversified firm. In this paper, for a sample of 551 diversified firms from 1992 to 2006, we explore managerial risk-taking incentives and its impact on stock price with respect to the intensity of internal capital allocation activities (i.e., active versus passive). We argue that the option-like structure of equity-based compensation encourages managerial risk-taking, and provide new evidence on the way in which CEO’s risk-taking could manifest itself in a diversified firm. Our results show that a greater sensitivity of managerial compensation to shareholder wealth – as proxied by CEO’s portfolio vega – leads to greater risk-taking through active capital allocation. We then analyze the impact of the risk-taking on shareholder wealth, and demonstrate that risk-taking does not result in a reduction in future stock price. Overall, this paper contributes to the literature by providing evidence that equity-based compensation does actually promote the alignment of interests between shareholders and managers. The convexity of equity-based compensation encourages CEOs to take more risk through a proactive allocation of resources. At the same time, the simultaneous impact of stock price on CEO’s equity-related wealth and shareholders’ wealth prevents CEOs from engaging in strategies that recklessly increase risk and destroy firm value.
Key Words: Risk-taking, Equity-based compensation, Internal capital allocation
학회소식
학회소식
[2010년 제 4차] Managerial Incentives for Risk-Taking and Internal
작성자 : 관리자
조회수 : 1119
게시일 :
2010-12-09