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Type: Journal article
Title: Managerial risk incentives and a firm's financing policy
Author: Karpavicius, S.
Yu, F.
Citation: Journal of Banking and Finance, 2019; 100:167-181
Publisher: Elsevier
Issue Date: 2019
ISSN: 0378-4266
Statement of
Sigitas Karpavičius, Fan Yu
Abstract: This paper provides a theoretical explanation for how risk preferences of a firm’s manager impact a firm’s optimal financing policy and shareholder value. The developed model implies that firms in growing industries are more valuable if they are run by more risk-seeking managers. Similarly, firms operating in declining industries should be run by less risk-seeking managers. Given that a firm’s optimal assets do not depend on the growth opportunities, and that debt is the difference between assets and equity, the model implies that there is a negative (positive) correlation between the riskiness of CEOs’ compensation packages and firms’ financial leverage ratios for firms in growing (declining) industries. This prediction is in stark contrast to economic intuition and prior literature in that less risk aversion normally should increase risk-taking. The empirical analysis generally supports all the model’s implications except those related to firms operating in declining industries.
Keywords: Capital structure; risk preferences; growth opportunities; firm value
Rights: © 2019 Elsevier B.V. All rights reserved.
DOI: 10.1016/j.jbankfin.2019.01.013
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