Idiosyncratic Risk, Risk-Taking Incentives and the Relation Between Managerial Ownership and Firm Value

European Journal of Operational Research, Forthcoming

59 Pages Posted: 21 Jul 2012 Last revised: 2 Jul 2020

See all articles by Chris Florackis

Chris Florackis

University of Liverpool (UK)

Angelos Kanas

University of Crete - Department of Economics

Alexandros Kostakis

University of Liverpool - Management School (ULMS); The University of Manchester - Manchester Business School

Sushil Sainani

University of Liverpool

Date Written: 2019

Abstract

In addition to its well-documented alignment effect, managerial ownership may also value-destroying effects by shifting risk to managers and encouraging risk-substitution; that is, managers with relatively undiversified personal portfolios tend to pass up profitable projects with high idiosyncratic (firm-specific) risk in favor of less-profitable projects that have greater aggregate (market) risk. Using parametric and semi-parametric estimation methods, we examine how managerial ownership influences firm value in light of the trade-off between the alignment and the risk-substitution effects. We find that risk-substitution offsets the alignment effect of managerial ownership in firms that are exposed to severe risk-substitution problems, leading to a weak (or non-existent) association between managerial ownership and firm value. Our findings also suggest that semi-parametric methods may prove useful for future studies aiming at capturing nonlinear features in the data.

Keywords: Idiosyncratic Risk, Risk-substitution, Managerial Ownership, Firm Value, Semi-parametric Estimation

JEL Classification: G3, G32

Suggested Citation

Florackis, Chris and Kanas, Angelos and Kostakis, Alexandros and Sainani, Sushil, Idiosyncratic Risk, Risk-Taking Incentives and the Relation Between Managerial Ownership and Firm Value (2019). European Journal of Operational Research, Forthcoming , Available at SSRN: https://ssrn.com/abstract=2114391 or http://dx.doi.org/10.2139/ssrn.2114391

Chris Florackis (Contact Author)

University of Liverpool (UK) ( email )

The Management School
University of Liverpool
Liverpool, L 697ZH
United Kingdom

Angelos Kanas

University of Crete - Department of Economics ( email )

GR-74100 Rethymnon, GR-74100
Greece
0831-77427 (Phone)

Alexandros Kostakis

University of Liverpool - Management School (ULMS) ( email )

Chatham Building
Liverpool, L69 7ZH
United Kingdom

HOME PAGE: http://www.alexkostakis.com

The University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Sushil Sainani

University of Liverpool ( email )

Chatham Street
Brownlow Hill
Liverpool, L69 7ZA
United Kingdom

HOME PAGE: http://www.liverpool.ac.uk/management/staff/sushil-sainani/

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