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The Effect of Managerial Incentives to Bear Risk on Corporate Capital Structure and R&D Investment
Author(s) -
Nam Jouahn,
Ottoo Richard E.,
Thornton Jr. John H.
Publication year - 2003
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/1540-6288.00036
Subject(s) - incentive , volatility (finance) , business , stock (firearms) , monetary economics , leverage (statistics) , capital structure , debt , risk–return spectrum , financial economics , economics , finance , microeconomics , portfolio , mechanical engineering , machine learning , computer science , engineering
In this study we use estimates of the sensitivities of managers’ portfolios to stock return volatility and stock price to directly test the relationship between managerial incentives to bear risk and two important corporate decisions. We find that as the sensitivity of managers’ stock option portfolios to stock return volatility increases firms tend to choose higher debt ratios and make higher levels of R&D investment. These results are even stronger in a subsample of firms with relatively low outside monitoring. For these firms, managerial incentives to bear risk play a particularly pivotal role in determining leverage and R&D investment.