Download or read book Managerial Risk Taking Behavior and Equity Based Compensation written by Angie Low and published by . This book was released on 2010 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: I study managers' risk-taking behavior and how it is affected by equity-based compensation. I find that in response to an exogenous increase in takeover protection in Delaware during the mid-1990s, managers lower firm risk by 6%. I also find that the decrease in firm risk is concentrated among firms with low managerial equity-based incentives, in particular, firms with low CEO portfolio sensitivity to stock return volatility. Furthermore, firms respond to the increased protection accorded by the regime shift by providing managers with greater incentives for risk-taking.

Download or read book Share based pay and its effects on managerial risk taking written by Patrick Gebhard and published by GRIN Verlag. This book was released on 2013-03-21 with total page 59 pages. Available in PDF, EPUB and Kindle. Book excerpt: Bachelor Thesis from the year 2013 in the subject Business economics - Business Management, Corporate Governance, Technical University of Munich, language: English, abstract: This thesis studies the effects of share-based pay on managerial risk-taking. At first, the relationship between managers and shareholders as predicted by agency theory is described to motivate the use of share-based pay. Then, the influence of manager-specific attributes and compensation design on the risk premium and the risk incentives is discussed Theoretical and empirical research findings are presented and discussed to gain insights into the determinants and effects of stock-based compensation. Last but not least, a descriptive analysis of the payperformance sensitivities of the stock and option portfolios of board members in the German DAX and MDAX in the period of 2006 to 2010 is conducted. Zusammenfassung Die vorliegende Arbeit untersucht die Auswirkungen von aktienkursorientierter Vergütung auf das Risikoverhalten von Managern. Basierend auf den Vorhersagen des Principal- Agenten-Modells wird zunächst die Beziehung zwischen Aktionären und dem Vorstand beschrieben, um die Verwendung aktienkursorientierter Vergütung zu begründen. Darauffolgend wird der Einfluss von managerspezifischen Eigenschaften und der Vergütungsstruktur auf die Risikoprämie und die Risikoanreize dargelegt. Zur Identifizierung der Determinanten und Konsequenzen von aktienkursorientierte Vergütung werden theoretische und empirische Forschungsergebnisse präsentiert und diskutiert. Abschließend wird eine deskriptive Analyse der Unternehmensleistungssensitivitäten von Aktien- und Aktienoptionsportfolios von Vorständen aus DAX und MDAX in der Periode von 2006 bis 2010 durchgeführt.

Download or read book Managerial Risk Shifting Incentives of Option Based Compensation written by Toke Hjortshoj and published by . This book was released on 2007 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies the relation between option-based compensation grants and managerial risk-taking behavior. We examine risk-shifting in stock and asset risk, where the unobservable asset risk is estimated using the volatility restriction method and Moody's KMV algorithm in a Merton (1974) framework. Our empirical results provide support for the hypothesis that managers increase stock risk by increasing both asset risk and leverage. Furthermore, our unique dataset allows us to investigate whether grant date moneyness affects managers' risk-shifting behavior. Consistent with recent theoretical predictions we find that out-of-the-money option grants cause increased risk-taking, while deep-in-the-money option grants reduce managerial risk-taking.

Download or read book Employment Risk Compensation Incentives and Managerial Risk Taking written by Alexander Kempf and published by . This book was released on 2007 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Strategic Risk Taking written by Aswath Damodaran and published by Pearson Prentice Hall. This book was released on 2008 with total page 409 pages. Available in PDF, EPUB and Kindle. Book excerpt: Groundbreaking book that redefines risk in business as potentially powerful strategically to help increase profits. bull; Get out of your "defensive crouch ": learn which risks to avoid, which to mitigate, and which to actively exploit. bull; Master risk management techniques that can drive competitive advantage, increase firm value, and enhance growth and profitability. bull; By Dr. Aswath Damodaran, one of the field's top "gurus " - known worldwide for his classic guides to corporate finance and valuation.

Download or read book Research Handbook on Executive Pay written by John S. Beasley and published by Edward Elgar Publishing. This book was released on 2012-01-01 with total page 553 pages. Available in PDF, EPUB and Kindle. Book excerpt: Research on executive compensation has exploded in recent years, and this volume of specially commissioned essays brings the reader up-to-date on all of the latest developments in the field. Leading corporate governance scholars from a range of countries set out their views on four main areas of executive compensation: the history and theory of executive compensation, the structure of executive pay, corporate governance and executive compensation, and international perspectives on executive pay. The authors analyze the two dominant theoretical approaches – managerial power theory and optimal contracting theory – and examine their impact on executive pay levels and the practices of concentrated and dispersed share ownership in corporations. The effectiveness of government regulation of executive pay and international executive pay practices in Australia, the US, Europe, China, India and Japan are also discussed. A timely study of a controversial topic, the Handbook will be an essential resource for students, scholars and practitioners of law, finance, business and accounting.

Download or read book Corporate Governance and the Over investment of Surplus Cash written by Scott Anthony Richardson and published by . This book was released on 2003 with total page 200 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Corporate Risk Governance written by Mr. Gaizka Ormazabal Sanchez and published by Stanford University. This book was released on 2011 with total page 185 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation comprises three papers on the governance of corporate risk: 1. The first paper investigates the role of organizational structures aimed at monitoring corporate risk. Proponents of risk-related governance structures, such as risk committees or Enterprise Risk Management (ERM) programs, assert that risk monitoring adds value by ensuring that corporate risks are managed. An alternative view is that such governance structures are nothing more than window-dressing created in response to regulatory or public pressure. Consistent with the former view, I find that, in the period between 2000 and 2006, firms with more observable risk oversight structures exhibit lower equity and credit risk than firms with fewer or no observable risk oversight structures. I also provide evidence that firms with more observable risk oversight structures experienced higher returns during the worst days of the 2007-2008 financial crisis and were less susceptible to market fluctuations than firms with fewer or no observable risk oversight structures. Finally, I find that firms without observable risk oversight structures experienced higher abnormal returns to recent legislative events relating to risk management than firms with observable risk oversight structures. 2. The most common empirical measure of managerial risk-taking incentives is equity portfolio vega (Vega), which is measured as the dollar change in a manager's equity portfolio for a 0.01 change in the standard deviation of stock returns. However, Vega exhibits at least three undesirable features. First, Vega is expressed as a dollar change. This implicitly assumes that managers with identical Vega have the same incentives regardless of differences in their total equity and other wealth. Second, the small change in the standard deviation of returns used to calculate Vega (i.e., 0.01) yields a very local approximation of managerial risk-taking incentives. If an executive's expected payoff is highly nonlinear over the range of potential stock price and volatility outcomes, a local measure of incentives is unlikely to provide a valid assessment of managerial incentives. Third, Vega is measured as the partial derivative of the manager's equity portfolio with respect to return volatility. This computation does not consider that this partial derivative also varies with changes in stock price. The second paper develops and tests a new measure of managerial risk-taking equity incentives that adjusts for differences in managerial wealth, considers more global changes in price and volatility, and explicitly considers the impact of stock price and volatility changes. We find that our new measure exhibits higher explanatory power and is more robust to model specification than Vegafor explaining a wide range of measures of risk-taking behavior. 3. The third paper examines the relation between shareholder monitoring and managerial risk-taking incentives. We develop a stylized model to show that shareholder monitoring mitigates the effect of contractual risk-taking incentives on the manager's actions. Consistent with the model, we find empirically that the positive association between the CEO's contractual risk-taking incentives and risk-taking behavior decreases with the level of shareholder monitoring. Furthermore, consistent with the board anticipating and optimally responding to shareholder monitoring, boards of firms exposed to more intense monitoring design compensation contracts that provide higher incentives to take risks. Overall, our results suggest that, when evaluating risk-taking incentives provided by a compensation contract, it is important to account for the firm's monitoring environment.

Download or read book Risk return Tradeoffs and Managerial Incentives written by David Tsui and published by . This book was released on 2015 with total page 116 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Executive Compensation and Managerial Risk Taking written by Jeffrey L. Coles and published by . This book was released on 2014 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper provides empirical evidence of a strong relation between the structure of managerial compensation and both investment policy and debt policy. Higher sensitivity of CEO wealth to stock volatility (vega) is associated with riskier policy choices, including relatively more investment in Ramp;D, more focus on fewer lines of business, and higher leverage. These results are consistent with the hypothesis that higher vega in the managerial compensation scheme gives executives the incentive to implement policy choices that increase risk. Our results also indicate that these investment and financial policy choices are among the primary mechanisms through which vega affects stock price volatility.

Download or read book Executive Compensation written by Friedrich Kley and published by Nomos Verlagsgesellschaft. This book was released on 2017 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: The empirical analyses of data from large German public companies that are presented in this book show that the introduction of long-term orientated remuneration components for corporate executives increases their willingness to invest in riskier investment portfolios, at least in the short term. The study furthermore demonstrates that a payment model which emphasises equity-based remuneration elements is not sufficient to increase executives' long-term orientation. The results of the study's final analysis show that payment of executives in large German public companies has become more consistent across the board in recent years.

Download or read book The Temporal Structure of Equity Compensation written by Sugato Bhattacharyya and published by . This book was released on 2010 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt: Linking managerial incentives to payoffs to shareholders provides managers with incentives to act in the shareholders' interest and to enhance shareholder value. Such alignment, when achieved through long-term equity stakes, also imposes risks on managers and leads to excessive managerial conservatism with respect to project risk choice. Shorter term equity-linked incentives can mitigate such managerial risk aversion and lead to more efficient risk-taking. Optimal short-term equity-linked compensation never results in excessive risk-taking by managers of an all-equity firm. However, in the presence of potential debt overhang, short-term equity incentives may lead to excessive risk-taking. Thus, the temporal structure of optimal equity incentives differs amongst industrial and financial firms with high implicit leverage through deposit-taking and an one-size-fits-all approach to managerial compensation across firm-types is not optimal.

Download or read book Rewarding Risk Taking Or Managerial Skill The Case of Private Equity Fund Managers written by Axel Buchner and published by . This book was released on 2015 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: Compensation of private equity fund managers typically consists of a fixed management fee and a performance related carried interest which entitles managers to option-like payoffs. We consider whether this structure tends to reward excessive risk-taking rather than managerial skill. Our model of manager compensation is based on risk-neutral pricing techniques in an equilibrium framework where investors earn zero abnormal returns net-of-fees. When the model is calibrated to a set of buyout funds, our results demonstrate that managers indeed have an incentive for excessive risk-taking in case only fee income from the current finite lifetime fund is considered. In the more realistic setting where managers take into account potential compensation from follow-on funds, the risk-taking incentives will depend on the manager's level of skill. Our model illustrates that the typical contractual arrangements can serve as a means of limiting possible risk-shifting behavior during fund lifetime. Also, skilled managers in this setting even have an incentive to reduce fund risk. Based on our sample of buyout funds we further show that the typical compensation structure is costly. Managers must generate substantial alpha in order to compensate investors for bearing the given fee components. Based on a standard compensation contract, annual break-even alphas amount to around 7 percent, and the present value of total compensation equals about 20 percent of committed capital.

Download or read book Managerial Risk Taking Incentives and Firm Risk in the Post Regulatory Era written by Tanseli Savaser and published by . This book was released on 2014 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: We provide evidence that there has been a fundamental change in the relationship between managerial risk taking incentives and firm risk after 2002, a period characterized by significant regulatory changes concerning executive compensation practices in public corporations. A consequence of the regulatory changes is a drop in CEO stock option grants, translated into significantly lower risk-taking incentives. We show that firms with different risk profiles have responded to regulatory changes differently. Riskier firms decreased the stock option grants, thus risk-taking incentives to their CEOs the most. Yet, the changes in risk-taking incentives have not been accompanied by changes in firm risk. As a result, the relationship between managerial risk-taking incentives and firm risk becomes negative in the post-regulatory era.

Download or read book Moving Closer to the Action written by Cynthia E. Devers and published by . This book was released on 2011 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the influence of CEO equity-based compensation on the strategic risk taking by the firm. Building off of the Behavioral Agency Model, Agency Theory, and Prospect Theory, we develop arguments about when equity-based compensation elements will increase and when they will decrease executive risk propensity and, in turn, strategic risk taking. Incorporating a behavioral perspective into our models of incentive alignment provides us with new and potentially more accurate predictions about how individual elements of CEO pay will influence risk selection, as well as how equity compensation interacts with cash compensation and with other factors to influence risk preferences. In general, this study provides evidence that CEO equity-based compensation significantly influences strategic risk, but that this influence is more nuanced and complex than conventional treatments of executive compensation assume. In particular, we find that different forms of equity-based pay exhibit dissimilar influences on strategic risk and that their influence changes as their value and vesting status change. Second, we find that cash-based forms of pay moderate the incentive properties of equity-based pay, indicating that cash-based pay may affect how executives perceive risks associated with equity pay. Finally, we find that stock price volatility and board actions each also moderate the incentive effects of equity-based pay. In sum, our results argue for increased recognition of a behavioral perspective on executive compensation and greater precision in how we measure and model the incentive alignment properties of CEO compensation.

Download or read book Pay Without Performance written by Lucian A. Bebchuk and published by Harvard University Press. This book was released on 2004 with total page 308 pages. Available in PDF, EPUB and Kindle. Book excerpt: The company is under-performing, its share price is trailing, and the CEO gets...a multi-million-dollar raise. This story is familiar, for good reason: as this book clearly demonstrates, structural flaws in corporate governance have produced widespread distortions in executive pay. Pay without Performance presents a disconcerting portrait of managers' influence over their own pay--and of a governance system that must fundamentally change if firms are to be managed in the interest of shareholders. Lucian Bebchuk and Jesse Fried demonstrate that corporate boards have persistently failed to negotiate at arm's length with the executives they are meant to oversee. They give a richly detailed account of how pay practices--from option plans to retirement benefits--have decoupled compensation from performance and have camouflaged both the amount and performance-insensitivity of pay. Executives' unwonted influence over their compensation has hurt shareholders by increasing pay levels and, even more importantly, by leading to practices that dilute and distort managers' incentives. This book identifies basic problems with our current reliance on boards as guardians of shareholder interests. And the solution, the authors argue, is not merely to make these boards more independent of executives as recent reforms attempt to do. Rather, boards should also be made more dependent on shareholders by eliminating the arrangements that entrench directors and insulate them from their shareholders. A powerful critique of executive compensation and corporate governance, Pay without Performance points the way to restoring corporate integrity and improving corporate performance.

Download or read book On Managerial Risk Taking Incentives When Compensation May Be Hedged Against written by Jaksa Cvitanic and published by . This book was released on 2008 with total page 23 pages. Available in PDF, EPUB and Kindle. Book excerpt: When the compensation risk can be hedged away completely, the manager will try to maximize the market value of the compensation. When the risk can be hedged partially, numerical examples for a CARA manager illustrate how incentive effects depend on the relative size of systematic and specific risk premia of the output and of the hedging asset. When the specific risk can be modified, higher specific risk premium leads to more incentive contracts. In most cases call and put options induce higher risk taking than shares, but put options may induce lowering of the specific risk. The hedging manager may be less aggressive than the non-hedging manager when the risk premium is low, or when modifying specific risk while being compensated by put options.