An Empirical Research On The Impact Of Equity Incentives On Corporate Risk-taking

Equity incentives are known as the golden handcuffs of managers and have been treated as a recipe for solving agency conflicts.The agency conflicts are due to the fact that both shareholders and managers have different ways to get returns in the company,and they have different utility functions.Managers are unsupervised,considered as risk-averse and rational economic man.In order to maximize their own utility,managers will deviate from the expectations of the shareholders,resulting in agency costs.The agency conflicts between company shareholders and managers also reflect in the acceptance of corporate risk-taking level.Corporate risk-taking behavior is an important behavior in the company's management activities,which reflects the attitude of companies engaged in the operation and management risk activities.Corporate risk-taking is also called as risk self-retention.Corporate risk comes from the Corporates' investment,financing and business activities.Corporate risk-taking means acceptance of the risk of the company management activities.This paper argues that equity incentives which can solve the agent conflicts can also solve the conflicts with corporate risk-taking levels between shareholders and managers.First,this paper supports that the positive correlation between equity incentives and corporate risk-taking level.Equity incentives make principals' and agents' interest consistent and reduce agency costs.Equity incentives limit the degree of loss and unlimit the degree of profit.Therefore,the conclusion of the principal-agent theory is that the equity incentives can make the managers overcome the tendency of risk aversion and increase the risk-taking behavior that accord with the interests of the shareholders.The conclusion of the manager's salary theory is that the equity incentives may increase managers' speculative behaviors,also increasing the risk-taking behaviors.Based on these two points,this paper supports that the positive correlation between equity incentive and corporate risk-taking level.Second,under the theory of corporate behavior,combined with the prospect theory,this paper studies the effect of psychological perceptions caused by different performance feedback on the relationship between equity incentives and corporate risk-taking level.In the case of positive performance feedback,managers believe that they are in the profit range,tend to avoid risk.In the case of negative performance feedback,managers think that they are in the loss range,tend to pursue risk.Positive performance feedback and negative performance feedback play different roles in the relationship between equity incentives and corporate risk-taking level.This paper argues that the corporate risk-taking behaviors will eventually be reflected in the corporate risk indexes.So this paper uses the volatility of the stocks' return as a substitute for risk-taking,and empirically examines the relationship between equity incentives and corporate risk-taking level.This paper argues that performance feedback based on the firm's own historical performance is more explanatory to the behaviors of the firms.Therefore,that performance feedback is used as the adjustment variable to test its influence on the relationship between equity incentives and corporate risk-taking level.This paper examines the different effects of positive performance feedback and negative performance feedback,respectively.This paper hopes to clarify the mechanism of equity incentives to the corporate risk-taking level,which will help the enterprises to use the equity incentives according to their own situations,perfect the implementation method of equity incentives and make the corporate risk-taking level meet the needs.Corporate performance feedback will affect the relationship between equity incentives and corporate risk-taking level.Positive performance feedback weakens the relationship,and negative performance feedback strengthens their relationship.