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Author: David Tsui Publisher: ISBN: Category : Languages : en Pages : 59
Book Description
I examine the relation between shareholder value and managerial risk-taking and how this value-risk tradeoff influences managers' incentive compensation packages. I find that shareholder value increases with risk and therefore managerial risk aversion creates potential agency conflicts between managers and shareholders. I also find that firms provide managers with stronger risk-taking incentives when value-risk tradeoffs are steeper (i.e., the marginal benefit of risk-taking is greater) and therefore potential risk-related agency costs are more severe, particularly when shareholder value increases with idiosyncratic (rather than systematic) risk and managers are more risk-averse. Collectively, these results suggest that firms deliberately provide managers with risk-taking incentives to address risk-related agency conflicts and these incentives do not encourage widespread “excessive” risk-taking. I also provide an explanation for conflicting prior evidence on the incentive effects of managers' stock holdings by showing that these incentives vary based on firms' value-risk tradeoffs.
Author: David Tsui Publisher: ISBN: Category : Languages : en Pages : 59
Book Description
I examine the relation between shareholder value and managerial risk-taking and how this value-risk tradeoff influences managers' incentive compensation packages. I find that shareholder value increases with risk and therefore managerial risk aversion creates potential agency conflicts between managers and shareholders. I also find that firms provide managers with stronger risk-taking incentives when value-risk tradeoffs are steeper (i.e., the marginal benefit of risk-taking is greater) and therefore potential risk-related agency costs are more severe, particularly when shareholder value increases with idiosyncratic (rather than systematic) risk and managers are more risk-averse. Collectively, these results suggest that firms deliberately provide managers with risk-taking incentives to address risk-related agency conflicts and these incentives do not encourage widespread “excessive” risk-taking. I also provide an explanation for conflicting prior evidence on the incentive effects of managers' stock holdings by showing that these incentives vary based on firms' value-risk tradeoffs.
Author: David Tsui Publisher: ISBN: Category : Languages : en Pages : 116
Book Description
Moral hazard theory posits that managerial risk aversion imposes agency costs on shareholders, and firms respond by providing risk-taking incentives to mitigate these costs. The underlying assumption in this literature is that increasing shareholder value requires increasing risk, yet there is limited empirical evidence supporting this assumption or the role of such risk-return tradeoffs in incentive compensation design. Using measures based on the firm's stock price, I find that shareholder value increases with risk, consistent with managerial risk aversion imposing agency costs on shareholders. I also find that firms provide managers with more risk-taking incentives when this risk-return relation is more positive and thus potential risk-related agency costs are more severe. This finding is strongest among firms where value increases with idiosyncratic rather than systematic risk, consistent with theory that these agency costs arise primarily from managers' exposure to idiosyncratic risk. Overall, these results are consistent with firms designing managerial compensation contracts to mitigate risk-related agency costs. Additional findings highlight that the incentives from equity-based compensation depend on the risk-return tradeoffs that managers face, providing one explanation for the conflicting results in prior literature regarding the incentives from managerial stock price exposure.
Author: Scott McKnight Publisher: ISBN: Category : Languages : en Pages : 60
Book Description
We provide new evidence that equity incentives can have perverse effects on firm value. Conditioning the relationship between chief executive officer (CEO) incentives and the risk exposure generated by corporate policy decisions on how risk is expected to affect firm value, we find that delta encourages value-maximising investment and firm focus policy decisions, but may lead to sub-optimal financing decisions. When the goal of value-maximisation conflicts with the CEO's propensity to avoid risk, the incentive effect of delta partially offsets risk aversion. We show that while CEO incentives affect corporate policy, the firm's optimal policy also influences the compensation contract.
Author: Publisher: ISBN: Category : Risk Languages : en Pages : 39
Book Description
"Uncertainty has qualitatively different implications than risk in studying executive incentives. The authors study the interplay between profitability uncertainty and moral hazard, where profitability is multiplicative with managerial effort. Investors who face greater uncertainty desire faster learning, and consequently offer higher managerial incentives to induce higher effort from the manager. In contrast to the standard negative risk-incentive trade-off this 'learning-by-doing' effect generates a positive relation between probability uncertainty and incentives. They document empirical support for this prediction."--Abstract.
Author: Chang Mo Kang Publisher: ISBN: Category : Languages : en Pages : 322
Book Description
This dissertation examines how the structures of compensation for executives and directors are affected by the possibility that managers can influence the risk of a firm's cash flows. In chapter 1, I consider a moral hazard model which shows that a strong pay-for-performance sensitivity in managerial compensation may deteriorate shareholder value when shareholders cannot monitor managerial risk-seeking activities. Intuitively, while high-powered managerial compensation provides the manager with incentives to increase the firm's value by exerting effort, it also creates managerial incentive to engage in (unproductive) risk-seeking activities. To test this prediction, I consider a regulatory change that makes it more difficult for managers to conceal information about the (speculative) use of derivative instruments. Specifically, I examine how the structures of compensation for executives and managers are affected by the adoption of a new accounting standard, the Statement of Financial Accounting Standard No. 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) which mandates the fair value accounting for derivative holdings. Consistent with the model prediction, I find that relative to other firms, derivative users (firms that traded derivatives before adopting FAS 133) increase the pay-for-performance sensitivity of CEO/CFO compensation. In Chapter 2, I extend the model by incorporating the realistic features that shareholders delegate to the (self-interested) board the tasks of monitoring managers and of setting their compensation contracts. My analysis shows that while high-powered board compensation induces the board to monitor the firm and to properly design managerial compensation, it also provides the board with incentives to misreport managerial risk-seeking activities and to engage in collusive behavior with the manager at the expense of shareholders. From these trade-offs, I develop a number of testable hypotheses and take them to the data. Consistent with the model predictions, I find that firms in which (i) managerial risk-seeking activities are more likely to occur (e.g., high R&D firms or banks) and (ii) board monitoring costs are likely to be lower (e.g., firms that have non-officer blockholders on the board) show weaker pay-for-performance sensitivity of board compensation and stronger pay-for-performance sensitivity of CEO compensation.
Author: Alexander Ljungqvist Publisher: ISBN: Category : Languages : en Pages : 40
Book Description
We examine the relation between firm value and managerial incentives in a sample of 1,307 publicly-held U.S. firms in 1992-1997. As predicted by Berle and Means (1932), we find that CEOs do not maximize firm value when they are not the residual claimant: our firms have higher Tobin's Q, the higher are CEO stockholdings. We also investigate the incentive properties of options and find that CEOs appear to hold too many options and that these options are insufficiently sensitive to firm risk. Our results do not appear to be driven by endogeneity biases. To assess the economic significance of the suboptimal provision of incentives, we compute an explicit performance benchmark which compares a firm's actual Tobin's Q to the Q* of a hypothetica fully-efficient firm having the same inputs and characteristics as the original firm. The Q of the average sample firm is around 12% lower than its Q*, equivalent to a $751 million reduction in its potential market value.
Author: David Tsui
Author: David Tsui
Author: David Tsui
Author: Sonku Kim
Author: Scott McKnight
Author: Michel Habib
Author: 
Author: Oleksandra Klink
Author: Chang Mo Kang
Author: Alexander Ljungqvist
Author: Scott McKnight