A Study On Risk Taking Behavior Of Managers Based On Prospect Theory

In recent years, the conclusions of scholars' studieson the effects of stock options to risk-taking behavior of managers are full of contradictions.Classical agency scholars believe that the stock options lead to motivate managers to take more risk, but behavioral scholars thought that stock options will lead to less risk-taking. Based on prospect theory,this thesis constructed a managers' risk-taking decision model to explain the causes of such conflicts in theory to some extent from a new perspective. We found that in the early stages of stock options awarded, managers will tend to pursue high-yield and invest high-risk projects. But when stock options accumulated some value, managers will turn to relatively conservative risk takers. They will choose the risky projects only when the investment outlook is good enough, and more likely to choose low-risk projects, which behaviors are not consistent with shareholders' interests. On this basis, this thesis proposes an improved way of equity incentives and proves that this approach can effectively alleviate the problems of traditional equity incentive planswhich lead managers to take behaviors that donot meet the interests of the company. Based on a new theoretical model, we use historical data of listed companies in China from 2006-2014 to do the empirical analysis, the results effectively support the conclusions derived from the theoretical model above and these provide further evidence of internal mechanism that how stock options affects risk-taking behavior of the managers.