Managerial Risk Aversion Research Articles

The impact of climate risk on corporate innovation: An international comparison

Employing an international sample of 10,012 firms across 62 economies spanning 2005–2017, we show that climate risk is negatively associated with corporate innovation activities. This finding is consistent with increased managerial risk aversion when managers perceive higher climate risk, leading to lower innovativeness. Through risk-buffering mechanisms, the negative association is weaker when firms are not subject to financial constraints, when corporate governance is stronger, and when the economy is more developed. Through risk-sharing mechanisms, better equity market development, greater trade openness, and greater insurance coverage can help mitigate the negative impact of climate risk on corporate innovation. Further analyses suggest that firms respond to climate change by inventing more green patents. Our study has implications for how to motivate corporate innovation in high-climate-risk economies.

Customer Concentration, Managerial Risk Aversion, and Hostile Takeover Threats

Customer Concentration, Managerial Risk Aversion, and Hostile Takeover Threats

Narcissistic CEOs, dynamic capability, and green innovation

Green innovation is currently recognized as a critical aspect for organizations to create economic value while contributing to ecological sustainability. Using the rationale of upper echelons theory, the present study introduces CEO narcissism, an important but underexplored psychological trait, and dynamic capability to probe the mechanisms driving green innovation. The regression findings show that enterprises with narcissistic CEOs do better in terms of green innovation. According to the mediation study findings, dynamic capability mediates between the CEO narcissism and corporate green innovation. In addition, the examination of mediated moderation reveals that top management risk aversion could negatively moderate this mediation effect. Such observations not only show that the CEO's personality has the potential to enhance corporate green achievements, but also discover the underlying mechanism which would provide guidance to help firms to be green.

Ownership effects on direction of multinationality: Evidence from Indian EMNEs

AbstractAn essential yet challenging decision that emerging market multinational enterprises (EMNEs) must make when setting up a subsidiary abroad is whether to do it in developed or emerging market economies. The extant literature has rarely probed what influences the location choice of EMNEs' outward investments. This paper aims to address this gap and hypothesizes that large shareholdings by promoters or foreign institutional investors negate agency problems (due to managerial risk aversion) and enhance the propensity to pursue risky but value‐accrediting upmarket strategies. Furthermore, this paper argues that these beneficial effects of large owners are significantly weaker for group‐affiliated firms compared to their standalone counterparts. We test our proposed hypotheses using a proprietary, longitudinal dataset during 2007–2013 for 213 Indian multinational firms and find support for our arguments.

Organizational improvisation and corporate green innovation: A dynamic capability perspective

AbstractThe march toward fusing business with sustainability is articulated with the hope of offering solutions to global environmental degradation. Green innovation is often regarded as an effective strategy to induce double externality with positive innovation and environmental spillovers. Despite numerous research works on determinants of green innovation, the key question, however, whether and how organizational improvisation exerts its influence on innovatively being green is still unsolved. On this basis, the current study seeks to demonstrate a connection between organizational improvisation and corporate green innovation. According to the presented theoretical framework, organizational improvisation, which serves as a catalyst for improving learning processes, promotes green innovation. Furthermore, dynamic capabilities mediate this relationship, and top management risk aversion could weaken the successful transformation of substantive innovation and being green. Empirical evidence is found based on a sample of Chinese manufacturing firms with a moderated mediation analysis. These results extend the understanding of the role of improvisation in green achievements towards the fusion of unplanned change and order.

The generalist CEO pay premium and CEO risk aversion

AbstractWe investigate whether and how managerial risk aversion influences the structuring of the generalist pay premium. We use three candidate variables for managerial risk aversion: the CEO's equity portfolio vega, decision horizon, and wealth. We find that equity‐based pay differs between generalist CEOs (who have broader experience spanning several industries) and non‐generalist CEOs (who tend to have narrower, specialized industry‐specific experience) based on their risk appetite. Further, how the generalist pay premium is structured depends on the risk aversion measure. Because generalist CEOs tend to be better paid than their counterparts, understanding their risk aversion level will help companies improve the structure of these CEOs’ compensation packages, and ultimately those of all CEOs. When vega is the risk aversion measure, CEOs get compensated for bearing risk. However, generalist CEOs with high vegas suffer a “risk discount” in their compensation. These generalist CEOs are associated with lower cash, equity, and total pay. CEOs with longer decision horizons get more equity and less cash, but this structuring does not extend to the generalist CEOs. Finally, wealthier CEOs get more cash and total pay. However, generalist CEOs who are wealthier get less cash pay.

Shareholder litigation risk, managerial risk aversion, redeployable assets, and sustainability: A quasi-natural experiment

Shareholder litigation risk, managerial risk aversion, redeployable assets, and sustainability: A quasi-natural experiment

Formative experience and stock price crash risk: Evidence from China's "Down to the Countryside" movement.

This study explores the influence of chairpersons’ early life experiences during the “Down to the Countryside” movement—a unique social phenomenon in China—on company stock price crash risk. This study uses 2007–2018 data from China’s A-share listed companies and a multiple regression analysis model to assess the influence of chairpersons’ Down to the Countryside experiences on the stock price crash risk of their corresponding companies. The empirical results demonstrate that chairpersons’ “sent-down” experiences shaped their risk-aversion management style, reducing companies’ risk-taking capacity. Consequently, this formative experience reduces stock price crash risks and increases company value. Heterogeneity tests on companies with different property rights reveal that chairpersons’ sent-down experiences are more pronounced in non-state-owned companies, as against state-owned companies. To alleviate endogeneity issues (e.g., self-selection bias and omitted variables) various endogeneity controls (e.g., propensity score matching, placebo tests, and difference-in-differences (DID) tests) were conducted. The results also persisted in a series of robustness checks. This study provides a new perspective on the relationship between chairpersons’ early life experiences and stock price crash risks. The empirical evidence has implications for the recruitment, incentivization, and supervision of chairpersons.

Customer concentration, managerial risk aversion, and independent directors: A quasi-natural experiment

Exploiting a quasi-natural experiment based on an exogenous regulatory shock, we explore the effect of board independence on customer concentration. Our difference-in-difference estimates reveal that stronger board independence raises customer concentration. Specifically, a majority of independent directors on the board raise customer concentration by 12.98%− 32.43%. Motivated by managerial risk aversion, managers are in favor of lower customer concentration, resulting in a sub-optimal level of risk-taking. More effective governance in the form of more independent directors increases customer concentration, bringing it closer to the level consistent with shareholder wealth maximization. Additional analysis including propensity score matching and entropy balancing validates the results. Our study is the first to examine the effect of independent directors on customer concentration.

CSR variability, managerial risk aversion, and hostile takeover threats

AbstractThe quiet life hypothesis argues that, when managers are insulated from the discipline of the takeover market, they tend to be less ambitious, avoiding risky and complex investments that require more managerial time and efforts. In other words, they prefer to live a “quiet life.” Exploiting a distinctive measure of takeover vulnerability principally based on the staggered passage of state legislations, we investigate the quiet life hypothesis using corporate social performance. Our results show that more takeover exposure significantly raises CSR variability, consistent with the prediction of the quiet life hypothesis, where managers adopt riskier CSR strategies and investments when they are more exposed to takeover threats, resulting in higher CSR volatility. Specifically, an increase in takeover exposure by one standard deviation raises CSR variability by 5.23%–6.73%. Additional analysis corroborates the results, including propensity score matching, instrumental‐variable analysis, Lewbel's heteroscedastic identification, and entropy balancing.

Managerial risk aversion and the structure of executive compensation

AbstractResearch question/issueWe examine how chief executive officers' (CEOs) innate risk aversion influences the size and structure of their compensation contracts. In so doing, we estimate managerial risk aversion based on the Big Five personality traits—openness, conscientiousness, extraversion, agreeableness, and neuroticism—inferred using IBM's Personality Insights service.Research findings/insightsWe provide evidence that executives' inherent risk aversion is related to their compensation structure. Contrary to agency theory predictions, we find that more risk‐averse CEOs receive more cash‐based and less equity‐based compensation but receive lower total compensation. This relationship is moderated by differences in firms' resource advantages.Theoretical/academic implicationsDespite the theoretical prediction that managerial risk aversion is a key factor determining the structure of executives' compensation contracts, there is limited empirical evidence on whether firms adjust the components of compensation based on CEOs' risk preferences. Our results help us better understand the interplay between CEO personality and executive compensation.Practitioner/policy implicationsThis study offers important implications for organizations in that knowledge about executives' inherent risk aversion is important and relevant for designing effective compensation contracts.

The impact of CEO inside debt on the coinsurance effect and excess value of diversification

The tenets of agency theory suggest that CEO inside debt holdings induce risk-reducing corporate investments. Further, the coinsurance hypothesis implies that diversification strategies designed to decrease cross-segment correlations reduce firm risk. Motivated by these views, we hypothesize a positive relationship between CEO inside debt holdings and the risk-reducing (e.g., coinsurance) effect of diversification. Moreover, we examine the impact of coinsurance, induced by CEO inside debt holdings, on the excess value of diversification. Using a sample of 4053 firm-year observations for the period of 2006–2013, we document a positive relationship between CEO inside debt and the extent of the coinsurance effect of diversification. In addition, consistent with the implications of the managerial risk aversion hypothesis that risk-reducing corporate diversification strategies destroy shareholder value, our results show that the coinsurance effect of diversification, when induced by CEO inside debt, negatively affects the excess value of diversification.

CSR variability, managerial risk aversion, and hostile takeover threats

CSR variability, managerial risk aversion, and hostile takeover threats

Customer Concentration, Managerial Risk Aversion, and Independent Directors: A Quasinatural Experiment

Customer Concentration, Managerial Risk Aversion, and Independent Directors: A Quasinatural Experiment

CEO gender and risk aversion: Further evidence using the composition of firm’s cash

Recent studies suggest that the conventional measure of cash holdings used to capture managerial risk-aversion may be inadequate. Using a new measure of physical cash, which adequately captures managerial risk-aversion, we deduce that female CEOs exhibit risk-aversion not only by maintaining higher physical cash levels but also by adopting risk-reducing policies. These risk-averse policies may be detrimental for some shareholders (despite evidence that female executives reduce agency conflicts) and they may impact the demand for female CEOs in the CEO labor markets. Our results are robust and lend support to the contention that female risk-aversion exists even beyond the “glass-ceiling”.

Director Motivational Orientations: How New Director Regulatory Focus Shapes Market Reactions

We draw on regulatory focus theory and the governance literature to examine how and when shareholders react to the motivational orientations of newly appointed directors. We theorize that because directors high in promotion focus are likely to orient to the firm toward growth and maximize shareholder value, their appointments will generate positive market reactions. We also theorize that because the vigilance of directors high in prevention is likely to increase managerial risk-aversion and lead the firm to miss out on growth opportunities, the market will react negatively to their appointments. Further, we examine the moderating role of financial slack and industry munificence. Using a sample of 374 new director appointments by S&P 500 firms between 2004 and 2013, we find that shareholders favor directors high in promotion focus, and their reactions are amplified when financial slack is high. We also find that market reactions to directors high in prevention focus are contingent on whether the firm operates in industries high or low in munificence.

The impact of weather-induced moods on M&A performance

Unpleasant weather induces negative moods and, consequently, increases managerial risk aversion. We conjecture that this weather-induced risk aversion leads to better M&A performance by constraining managerial hubris, over-confidence and over-payment for targets. Using a large UK sample, we document robust and significant heterogeneity in M&A performance conditional on the weather. Specifically, UK acquirers earn significant positive CARs from deals announced in unpleasant weather but negative CARs otherwise.

Investment, idiosyncratic risk, and growth options

Abstract We provide evidence that growth options play an important role in determining the negative relation between corporate investment and idiosyncratic risk in the absence of agency problem. A simple real options model predicts that the negative relation between corporate investment and idiosyncratic risk is a U-shaped function of the level of idiosyncratic risk: investment responds the most when idiosyncratic risk is at the intermediate level. And the negative relation is stronger when firms possess more growth options. Our results are robust when we control for the effect of managerial risk aversion, supporting the view that firms’ optimal response to uncertainty is an important driving force behind the negative investment–idiosyncratic risk relation.

The nonlinear relation between financing decisions and option compensation

Recent studies argue that CEO option compensation affects executives’ behavior toward risk. Specifically, the literature provides seemingly conflicting evidence regarding the impact of equity compensation (particularly option holding) on financing activities. We propose and test a nonlinear (e.g., inverted U-shaped) relation between corporate borrowing and option compensation. Consistent with our hypothesis, we empirically show that, in the low range of the option vega, a firm’s debt ratio increases as the option vega increases. However, in the high range of the option vega, we find the opposite relation. Our explanation is based on the contrasting effects of option compensation on managerial incentives toward risk. The positive wealth effect on leverage arises from the convexity of the option compensation, while a negative risk-premium effect exists due to managerial risk aversion. This reconciles the conflicting relation between leverage and option compensation that is often observed in the literature.

Investment, Idiosyncratic Risk, and Growth Options

We provide evidence that growth options play an important role in determining the negative relation between corporate investment and idiosyncratic risk in the absence of agency problem. A simple real options model predicts that the negative relation between corporate investment and idiosyncratic risk is a U-shaped function of the level of idiosyncratic risk: investment responds the most when idiosyncratic risk is at the intermediate level. And the negative relation is stronger when firms possess more growth options. Our results are robust when we control for the effect of managerial risk aversion, supporting the view that firms' optimal response to uncertainty is an important driving force behind the negative investment-idiosyncratic risk relation.