Investment, Idiosyncratic Risk, and Ownership

Vasia Panousi, Dimitris Papanikolaou*

*Corresponding author for this work

Research output: Contribution to journalArticle

127 Scopus citations

Abstract

High-powered incentives may induce higher managerial effort, but they also expose managers to idiosyncratic risk. If managers are risk averse, they might underinvest when firm-specific uncertainty increases, leading to suboptimal investment decisions from the perspective of well-diversified shareholders. We empirically document that, when idiosyncratic risk rises, firm investment falls, and more so when managers own a larger fraction of the firm. This negative effect of managerial risk aversion on investment is mitigated if executives are compensated with options rather than with shares or if institutional investors form a large part of the shareholder base.

Original languageEnglish (US)
Pages (from-to)1113-1148
Number of pages36
JournalJournal of Finance
Volume67
Issue number3
DOIs
StatePublished - Jun 1 2012

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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