Managerial Compensation Incentives And Firm Risk-Taking

In the capital market, shareholders can eliminate the specific risk of company by holding the well-diversified portfolio, so shareholders are often risk neutral. However, in most cases, managers can only serve on one company at the same time, therefore, to ensure their job and incomes, managers tend to be risk aversion. The shareholders who are risk neutral hope managers invest all the projects that NPV(net present value) is greater than zero, without considering the risk. On the contrary, the shareholders who are risk aversion will refuse the projects that NPV is greater than zero but with higher risk. Related research also shows that, in the long run, risk-taking can improve the sales growth rate and value of enterprises, and it is the mediator which can affect the enterprise performance. Therefore, the risk aversion behavior of the manager will damage shareholder value, and produce agent cost. Effective managerial compensation incentives can make the benefit between managers and shareholders in line, and then promote managers risk-taking intention, and accepting all the projects that risk is higher but NPV is greater than zero.About the relationship between compensation incentives and risk-taking, foreign scholars have done much research from thress incentive aspects of cash compensation, managerial ownership and stock option. However, domestic study on non-financial enterprises risk-taking is less,and as to the effect of compensation incentives on risk-taking, related study is even fewer.Based on the above background, according to the principal-agent theory and incentive theory, this paper studies the relationship between managerial compensation incentives and firm risk-taking, as well as the effects of ownership properties and firm growth on this relationship by choosing the A-share companies listed in Shanghai and Shenzhen main board stock markets during 2003-2013 as samples and using the panel data regression analysis to research the total sample, non-state-owned enterprises, state-owned enterprises, high growth enterprises and low growth enterprises. Through empirical test, this paper has drawn the following conclusions:(1)Managerial cash compensation incentives can improve the level of firm risk-taking; (2)Compared with the state-owned enterprises, the positive relationship between managerial cash compensation incentives and firm risk-taking is stronger in the non-state-owned enterprises; (3) Compared with the low growth enterprises, the positive relationship between managerial cash compensation incentives and firm risk-taking is stronger in the high growth enterprises; (4) Both in high growth state-owned enterprises and low growth state-owned enterprises, managerial ownership has no significant impact on firm risk-taking; (5)In the non-state-owned enterprises, there is a negative relationship between managerial ownership and firm risk-taking, but the negative relationship is significant only in low growth enterprises. Finally, according to the empirical results, this paper presents advices about how to perfect cash compensation incentive and managerial ownership for listed companies, and the prospects for follow-up study.Starting with risk-taking, which is the mediator to affect the enterprises performance and long-term behavior, this paper has provided empirical support for the effectiveness of listed companies’ managerial compensation incentives, especially long-term effectiveness, enriching the domestic research on managerial compensation incentives and firm risk-taking.