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Managerial Incentives, Risk Aversion, and Debt

Published online by Cambridge University Press:  23 May 2014

Andreas Milidonis  and
Konstantinos Stathopoulos
Andreas Milidonis
Affiliation:
andreas.milidonis@ucy.ac.cy, Department of Accounting and Finance, University of Cyprus, PO Box 20537, Nicosia, CY-1678, Cyprus
Konstantinos Stathopoulos
Affiliation:
k.stathopoulos@mbs.ac.uk, Manchester Business School, University of Manchester, Booth Street East, Manchester, M15 6PB, United Kingdom
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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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 49 , Issue 2 , April 2014 , pp. 453 - 481
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2014 

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