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Managerial discretion and shareholder capital at risk
Author(s) -
Falkinger Josef,
Habib Michel A.
Publication year - 2021
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12513
Subject(s) - shareholder , discretion , constraint (computer aided design) , capital (architecture) , business , incentive , investment (military) , power (physics) , microeconomics , accounting , finance , monetary economics , economics , corporate governance , engineering , law , political science , mechanical engineering , physics , archaeology , quantum mechanics , politics , history
Managerial investment decisions put shareholder capital at risk. Shareholders respond either (i) by preserving the manager's discretion to choose among projects but decreasing the power of his (her) incentives, thereby decreasing the manager's gains from choosing risky projects, or (ii) by imposing a constraint on the type of project that the manager can undertake. We show that capital exposure—the extent to which managerial decisions put shareholder capital at risk—plays a central role in favoring the imposition of a constraint over the granting of discretion. We extend our analysis to consider other determinants of the choice between discretion and constraint.