Managerial Behavior, Risk Attitude, and Shareholders' Welfare

Abstract

This paper studies the effects of risk aversion attitudes on shareholders' welfare and agency costs with the stochastic optimal control model. The results show that there exists a complex non-linear relationship between agency costs and risk aversion attitudes under the context of management on-job consumption. And then we discuss some special case in which the managerial behavior and risk aversion how influence the welfare of shareholders. In the fist case we discuss the managerial behavior under exogenous stochastic shock, and we find that agency cost become observable and no verifiable. Under this condition, management on-job consumption level has a quasi-linear relationship with risk aversion attitude. The finding means that managers could manipulate information through unconventional information disclosure and exaggerate the probability of abrupt events, hence leading to investors' panic and herding behavior. The second case we discuss the risk attitude how influence the agency cost, we find an interesting phenomenon that there exists a non-linear relationship between agency costs and risk aversion attitudes, Agency costs rise as management on-job consumption increases, while shareholders' risk aversion attitudes can be hardly deduced through observation of agency costs. Put it another way, given management abuses shareholders' welfare for its on-job consumption, same agency costs may mean different risk aversion attitudes. Excluding the assets scale from consideration, the results demonstrate that different risk aversion attitudes may mean identical agency costs. At last, we discuss the managerial behavior and agency cost under different culture background and transitional economies.