This study examines an unexplored dimension of risk-taking incentives – heterogeneity among top executives – and its impacts on corporate outcomes.
Using a sample of S&P 1500 companies in 1992–2016, this study measures managerial heterogeneity as the standard deviation of risk-taking incentives of a firm's top-paid managers. The incentive measure is defined as the sensitivity of an executive's wealth in option holdings to a change in firm risk. Panel data regressions with fixed effects are employed. Furthermore, difference-in-difference and instrumental variables approaches are utilized to mitigate potential endogeneity concerns.
The findings indicate that firms run by top managers with more divergent risk-taking incentives tend to play it safe, characterized by lower risk-taking and weaker performance. The analysis also explores potential channels through which such heterogeneity may be linked to these outcomes: greater divergence in incentives is associated with attenuated investment efficiency, lower R&D, and less likelihood of M&A transactions.
Despite many previous studies on risk-taking incentives of a firm's CEO, little is known about the incentives of the firm's all executives as a team. When the top managers collectively make important decisions, heterogeneity in risk-taking may lead to conflicts between self-interested managers, consequently affecting the firm's decisions and performance. This observation contributes to the existing literature by highlighting the role of an unexplored management characteristic – risk-taking incentive heterogeneity – in corporate decision-making. The study underscores the notion that the efficiency of corporate decisions depends not only on the average level or strength but also on the divergence of managerial risk-taking incentives.
