Managerial Incentives, Risk Aversion, and Debt

43 Pages Posted: 5 Jul 2011 Last revised: 29 Oct 2012

See all articles by Andreas Milidonis

Andreas Milidonis

University of Cyprus - Department of Accounting and Finance

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School

Date Written: August 1, 2012

Abstract

We investigate the risk choices of risk averse CEOs. Following recent theoretical work, we expect CEO risk aversion to be more pronounced in firms with high leverage, or high default probability. We find that the CEOs of these firms reduce firm risk, even in the presence of strong risk taking incentives. Our results are robust to controls for the sensitivity of CEO wealth to stock price changes, firm risk determinants, the endogenous feedback effects of firm risk on CEO incentives, unobserved firm and market effects, and debt governance. The impact of CEO risk aversion is economically significant.

Keywords: Executive compensation, CEO incentives,Risk taking, Risky debt, Bankruptcy

JEL Classification: G32, G33, J33, J41

Suggested Citation

Milidonis, Andreas and Stathopoulos, Konstantinos, Managerial Incentives, Risk Aversion, and Debt (August 1, 2012). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=1879186 or http://dx.doi.org/10.2139/ssrn.1879186

Andreas Milidonis (Contact Author)

University of Cyprus - Department of Accounting and Finance ( email )

P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 22 893 626 (Phone)

HOME PAGE: http://www.ucy.ac.cy/~amilidon/

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School ( email )

AMBS Building
Booth Street West
Manchester, M15 6PB
United Kingdom
+44 161 275 6863 (Phone)
+44 161 275 4023 (Fax)

HOME PAGE: http://www.research.manchester.ac.uk/portal/K.Stathopoulos.html

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