Behavioral Agency Model Research Articles

The Effect of Stock Option Backdating on CEO Risk Taking

Existing compensation literature often assumes that stock options are granted at-the-money (when the option has no value). However, the popularity of stock option backdating implies this assumption is invalid in the real world. This study examines how stock option backdating affects executive risk taking by using the behavioral agency model and the house money effect view. While behavioral agency theory suggests a negative relationship between the gains of stock option backdating and subsequent risk taking, the house money effect advocates a positive relationship between these two factors. In addition, we propose that CEO vulnerability positively moderates the relationship between stock option backdating gains and executives’ risk taking behavior. Using a matched sample design, our empirical results support the house money effect predictions.

CEO Option Wealth and Firm Risk-Taking: An Analysis of Multiple Reference Points

The behavioral agency model suggests CEO current wealth affects firm risk-taking. Extending this theory we explore how reference points of CEO current and future wealth (as reflected in respective ...

Technology Acquisition in Family and Nonfamily Firms: A Longitudinal Analysis of Spanish Manufacturing Firms

Technology acquisition from external sources has been identified as a critical competence for sustained success in innovation, and research has paid a good deal of attention to studying its advantages, drawbacks, determinants, and outcomes. Traditionally, research has modeled the choice to acquire technology from outside a firm's boundaries as the result of a trade‐off between the benefits of external acquisition (e.g., higher return on investment, lower costs, increased flexibility, access to specialized skill sets, and creativity) and its drawbacks (e.g., opening the market to new entrants, risk of imitation of core competencies, and reduced value appropriability). Yet, this view does not capture the behavioral considerations that may potentially encourage or discourage managers from sourcing technology outside the firm's boundaries. This behavioral aspect is especially important if one wants to understand the conduct in external technology acquisition of family firms, which are found to favor strategic actions that preserve the controlling families' control and authority over business, even at the cost of giving up potential economic benefits. Thus, external technology acquisition is likely to be interpreted differently in family and nonfamily firms. Despite its importance, how the involvement of a controlling family affects decisions in technology and innovation management and specifically external technology acquisition is an overlooked topic in extant research and requires further theoretical and empirical examination. This study attempts to fill these gaps by extending the tenets of the behavioral agency model and prior research pointing to particularistic decision‐making in family firms to uncover the behavioral drivers of external technology acquisition in family and nonfamily firms. Theory is developed that relates performance risk, family management, and the contingent effect of the degree of technology protection on external technology acquisition, and the hypotheses are tested with longitudinal data on 1540 private Spanish manufacturing firms. The analyses show that managers are more likely to acquire technology from external sources through research and development contracting when firm performance falls below managers' aspirations. Family firms are generally more reluctant to acquire external technology, and the effect of negative aspiration performance gaps becomes less relevant as family management is higher, which is attributed to family managers' attempts to avoid losing control over the trajectory that technology follows over time. However, family firms become more favorable to considering the adoption of an open approach to technology development when some protection mechanisms (specifically, the filing of patents on the firm proprietary technologies) increase the managers' perceptions of control over the technology trajectory. As such, this study makes a contribution to the understanding of the behavioral factors driving external technology acquisition, and it offers important insights regarding technology strategy in family firms.

The influence of relative values of outside director stock options on firm strategic risk from a multiagent perspective

Prior work has examined the effects of absolute levels of outside director stock option grants on risk behavior without recognizing that relative stock option values could differentially affect risk taking. Drawing from the house money effect perspective, we extend this literature by examining how positive deviation from prior outside director option grants values influences firm strategic risk. Additionally we draw from the behavioral agency model and the power literature to develop a multiagent contingency framework suggesting the effect of positive director pay deviation depends on the incentives and power of CEOs reflected in CEO stock ownership and CEO duality, respectively. Our empirical results indicate positive pay deviation has a positive effect on firm risk taking while high ownership and duality independently and jointly weaken this base relationship. Copyright © 2013 John Wiley & Sons, Ltd.

Risk abatement as a strategy for R&D investments in family firms

The behavioral agency model suggests family firms invest less in R&D than nonfamily firms to protect their socioemotional wealth. Studies support this contention but do not explain how family firms make R&D investments. We hypothesize that when performance exceeds aspirations, family firms manage socioemotional and economic objectives by making exploitative R&D investments that lead to more reliable and less risky sales levels. However, performance below aspirations leads to exploratory R&D investments that result in potentially higher but less reliable sales levels. Using a risk abatement model, our analyses of 847 firms over 10 years supports our hypotheses. Copyright © 2013 John Wiley & Sons, Ltd.

The Decision of the Supply Chain Executive to Support or Impede Supply Chain Integration: A Multidisciplinary Behavioral Agency Perspective

Applying the behavioral agency model developed by Wiseman and Gomez-Mejia (1998), this paper analyzes human resource factors that induce supply chain executives (SCEs) to make decisions that foster or hinder supply chain integration. We examine two internal sources - compensation and employment risk - and one external source - environmental volatility - of risk bearing that can make SCEs more reluctant to make the decision of promoting supply chain integration. We argue and empirically confirm the notion that an employment and compensation system that increases SCE risk bearing reduces the SCE´s willingness to make risky decisions and thus discourages supply chain integration. We also reveal that this negative relationship becomes stronger under conditions of high environmental volatility. In addressing the “so what?” question, we find empirical support for the hypothesis that supply chain integration positively influences operational performance. Even though this decision has positive value for the firm, we found that SCEs discourage supply chain integration when they face higher risk bearing. Hypotheses are tested using a combination of primary survey data and archival measures in a sample of 133 Spanish firms.

Stock Options and CEO Temporal Orientation: The Behavioral Agency Model and Inter-Temporal Choice

We extend the behavioral agency model (BAM) to the study of temporal orientation and agent short-termism. Short-termism is a particular type of temporal orientation that has long been scorned for i...

The Moderating Effects of CEO Stock-Based Pay on Performance Feedback and Acquisition Risk

Traditional theoretical frameworks have assumed that all types of stock options uniformly facilitate risky acquisitions. This study extends the behavioral agency model by developing a nuanced theoretical framework predicting the differential moderating effects of in-the-money unexercisable and exercisable CEO stock options and restricted stock on the relationship between performance feedback and acquisition risk. In a negative performance context the discounting effect of high unexercisable options values amplifies CEO risk-seeking resulting in riskier acquisitions while the endowment of high exercisable options values and restricted stock into CEO personal wealth enhances risk aversion leading to less risky acquisitions. In a positive performance context high unexercisable options values weaken risk aversion while high exercisable options values and restricted stock amplify it. The results strongly supported the hypotheses.

Exploring the Effects of Managerial Ownership on the Decision to Go Private: A Behavioral Agency Model Approach

This paper utilizes the behavioral agency model to investigate why many formerly public companies have been converted to privately held corporations. Using a matched pairs sample and categorical binary regression, and controlling for effects found in previous studies, we explore how the equity ownership of those entrusted to manage firms, the firms’ executives, might affect their perceptions of the risks of going private and might therefore affect the decision to take a company private. This study complements prior research examining the predictors of public to private transactions and illustrates how behavioral agency theory can provide insight into a major decision regarding the firm’s corporate structure. It also extends the behavioral agency model to decisions involving organizational form. Keywords: public to private transactions; decision theory; governance; agency theory

Executive Stock Options as Mixed Gambles: Revisiting the Behavioral Agency Model

Conceiving of stock options as providing CEOs with cues for the possibility of both greater prospective wealth and losses to current wealth, we revisit predictions of the behavioral effects of equity-based pay using the behavioral agency model (BAM). We refine the BAM's original formulation and provide an explanation for previous conflicting empirical results by theorizing that the anticipation of prospective wealth attenuates the negative effect of accumulated current equity wealth upon CEO strategic risk taking. In doing so, we offer an advancement of the dialectic between: (1) classical agency scholars, arguing that equity-based pay leads to more risk taking, and (2) behavioral scholars, arguing that equity wealth creates risk bearing, leading to less risk taking. We also suggest that the influences of prospective wealth and current wealth on strategic risk taking depend on the extent to which agents can manage the risk inherent in their compensation package and agent vulnerability to losses. Formal hypotheses to test these expectations are made by focusing on equity-based compensation. Our findings offer strong support for these theoretical expectations.

Performance Attainment Discrepancy and R&D Intensity: CEO and Director Stock Options as Moderators

We contribute to the behavioral agency model by developing a theoretical framework predicting the differential interaction effects of performance attainment discrepancy and values of stock options ...

Variations in R&D Investments of Family and Nonfamily Firms: Behavioral Agency and Myopic Loss Aversion Perspectives

The behavioral agency model suggests that to preserve socioemotional wealth, loss-averse family firms usually invest less in R&D than nonfamily firms. However, behavioral agency model predictions are inconsistent with the well-accepted premise that family firms have a long-term investment orientation. We reconcile these seemingly incompatible predictions by adding insights from the myopic loss aversion framework, which deals with the impact of decision-making time horizons. The combination of these two prospect theory derivatives led us to hypothesize that family firms usually invest less in R&D than nonfamily firms but the variability of their investments will be greater owing to differences in the compatibility of long- and short-term family goals with the economic goals of a firm. However, when performance is below aspiration levels, we theorize that family goals and economic goals tend to converge. In this situation, the R&D investments of family firms are expected to increase and the variability of those investments decrease, relative to nonfamily firms. Analysis of 964 publicly held family and nonfamily firms from the Standard & Poor's 1500 between 1998 and 2007 support our hypotheses, confirming a need to take the heterogeneity of family firms more fully into account.

Does Greater Risk-Bearing in Stock Option Compensation Reduce the Influence of Problem Framing On Managerial Risk-Taking Behavior?

ABSTRACT: We examine the extent to which the behavioral agency model reflects the relation between greater risk-bearing in stock option compensation and managerial risk-taking. The behavioral agency model predicts that managers with greater wealth at stake will avoid risky projects that threaten their wealth. This greater risk-bearing effect moderates the problem-framing effect, which predicts that loss-averse managers will be more (less) risk-taking when choosing among loss (gain) projects. Using a 2 × 2 between-subjects experiment with 108 M.B.A. students acting as managers, we find that managers are more risk-taking in the loss context than in the gain context when they have at-the-money stock options but not when they have wealth at stake through in-the-money stock options. Further, we find that managers with in-the-money stock options are less risk-taking than managers with at-the-money stock options in the loss context. These findings support the behavioral agency model prediction that greater risk-bearing in stock option compensation (moving from at-the-money stock options to in-the-money stock options) reduces the problem framing effect on risk-taking behavior, particularly when the firm faces a loss decision context. Our results point to the importance of considering the implications of risk-bearing in stock option compensation for managers choosing risky projects that affect firm value.

A family firm variant of the behavioral agency theory

AbstractThere is currently a debate in the literature regarding whether family firm ownership fosters or discourages risk‐taking activities. In this article, we propose a contingency framework that shifts the focus of investigation: instead of asking whether family firms tend to be risk takers, we suggest specific ownership conditions under which privately owned family‐managed firms are more likely to engage in risk taking. We do so by integrating concepts from the behavioral agency model and a resource‐based concept known as familiness to advance a base proposition that explains the effects of different ownership structures (controlling ownership, sibling partnership, and cousin consortium) on risk‐taking behaviors in family firms. Then, drawing insights from the family firm and household economics literatures, we discuss the contingent effects of three distinct forms of altruism (parental, paternalistic, and psychosocial) on the base proposition. The framework advances our current understanding of risk taking in family businesses in two ways: first, by proposing how and when risk‐taking behaviors differ across these firms; and second, by offering a variant of the base behavioral agency model that is better suited for explaining risk taking at family firms. Copyright © 2010 Strategic Management Society.

The Decision of the Supply Chain Executive to Support or Impede Supply Chain Integration: A Multidisciplinary Behavioral Agency Perspective*

ABSTRACTApplying the behavioral agency model developed by Wiseman and Gomez‐Mejia (1998), this article analyzes human resource factors that induce supply chain executives (SCEs) to make decisions that foster or hinder supply chain integration. We examine two internal sources (compensation and employment risk) and one external source (environmental volatility) of risk bearing that can make SCEs more reluctant to make the decision to promote supply chain integration. We argue and empirically confirm the notion that an employment and compensation system that increases SCE risk bearing reduces the SCE's willingness to make risky decisions and thus discourages supply chain integration. We also reveal that this negative relationship becomes stronger under conditions of high environmental volatility. In addressing the “so what?” question, we found empirical support for the hypothesis that supply chain integration positively influences operational performance. Even though this decision has a positive value for the firm, we showed that SCEs discourage supply chain integration when they face higher risk bearing. Hypotheses are tested using a combination of primary survey data and archival measures in a sample of 133 Spanish firms.

Moving Closer to the Action: Examining Compensation Design Effects on Firm Risk

We examine the influence of CEO equity-based compensation on strategic risk taking by the firm. Building off the Behavioral Agency Model, Agency Theory, and Prospect Theory, we develop arguments about when equity-based compensation elements will increase or 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.

Disentangling compensation and employment risks using the behavioral agency model

AbstractEmploying survey and archival data from a sample of IPO firms, and extending the ideas of the Behavioral Agency Model, this study examines the influence of various forms of risk bearing created within the compensation contract on perceived risk taking. The results show that employment risk and variability in compensation each corresponds to greater risk taking, while downside risk and the intrinsic value of stock options correspond to lower risk taking. Among the implications from these results are the importance CEOs attach to relatively stable forms of pay, and to drawing distinctions between the potential for loss of pay and uncertainty about the amount of future pay. Copyright © 2007 John Wiley & Sons, Ltd.

Loss Aversion, Instant Endowment and Risk-Bearing: The Relation between Stock-Based Compensation and Managerial Risk-Seeking Behavior

We examine the extent to which the behavioral agency model describes the relation between stock-based compensation and managerial risk-seeking behavior. The behavioral agency model, which incorporates prospect theory, predicts that while managers are more risk-seeking in the loss decision context than in the gain decision context because of loss aversion, such risk-seeking behavior in the loss context is mitigated because managers instantly endow stock-based compensation (i.e., wealth at stake), which increases their risk-bearing. We find that in general, managers are more risk-seeking in the loss context than in the gain context, consistent with prospect theory. Contrary to prospect theory, however, we find that managers endowed with in-the-money stock options are less risk-seeking than managers endowed with at-the-money stock options. This finding is also contrary to agency theory which generally predicts that stock options encourage risk-seeking behavior. We also explore whether managers' subjective valuation of stock options is associated with risk-seeking behavior. We find evidence consistent with managers valuing stock options more than restricted stock of similar objective value. Overall, our results support the propositions based on the behavioral agency model. Moreover, managers appear to consider both risk-bearing as well as subjective valuations of stock-based compensation in their decision-making process. Our findings are important for those using and evaluating the efficacy of different types of stock-based compensation in inducing firm value-increasing risk-seeking behavior.

A Behavioral Agency Model of Managerial Risk Taking

Building on agency and prospect theory views, we construct, in this article, a behavioral agency model of executive risk taking. In the model we combine elements of internal corporate governance with problem framing to explain executive risk-taking behavior. The model suggests that executive risk taking varies across and within different forms of monitoring and that agents may exhibit risk-seeking as well as risk-averse behaviors. We develop specific propositions that combine monitoring with performance and the framing of strategic problems to explain executive choices of strategic risk. The resulting propositions enhance and extend the agency-based corporate governance literature on executive risk taking.

A Behavioral Agency Model of Managerial Risk Taking

A Behavioral Agency Model of Managerial Risk Taking