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Managerial incentives for risk-taking and internal capital allocation

Author

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  • Lorenzo Casavecchia

    (Department of Applied Finance and Actuarial Studies, Faculty of Business and Economics, Macquarie University, North Ryde, NSW, Australia; Finance Discipline Group, University of Technology Sydney, Ultimo, NSW, Australia)

  • Ja Young Suh

    (Finance Discipline Group, University of Technology Sydney, Ultimo, NSW, Australia)

Abstract

In this study, we show 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 multi-segment 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 risk-taking on shareholder wealth and demonstrate that risk-taking is positively associated with future stock returns. Overall, this article contributes to the literature by providing evidence that equity-based compensation does actually promote the alignment of interests between shareholders and managers.

Suggested Citation

  • Lorenzo Casavecchia & Ja Young Suh, 2017. "Managerial incentives for risk-taking and internal capital allocation," Australian Journal of Management, Australian School of Business, vol. 42(3), pages 428-461, August.
    • Handle: RePEc:sae:ausman:v:42:y:2017:i:3:p:428-461
    DOI: 10.1177/0312896216652181
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    References listed on IDEAS

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    Cited by:

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    4. Huang, Shuang & Zhang, Zheng & Nahm, Abraham Y. & Song, Zengji, 2024. "CEO's prison experience and corporate risk-taking," International Review of Financial Analysis, Elsevier, vol. 95(PB).

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    More about this item

    Keywords

    Equity-based compensation; internal capital allocation; risk-taking;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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