Termination risk and managerial risk taking |
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| Institution: | 1. Lingnan College, Sun Yat-sen University, Guangzhou, China;2. School of Accounting, Economics and Finance, University of Wollongong, Australia;3. Research School of Finance, Actuarial Studies & Statistics, Australian National University, Australia;4. Department of Applied Finance and Actuarial Studies, Macquarie University, Australia;1. School of Business, Renmin University of China, 59 Zhongguancun Street, Haidian District, Beijing 100872, China;2. Shanghai Advanced Institute of Finance, Shanghai Jiaotong University, 211 West Huaihai Road, Datong Plaza, Shanghai 200030, China;1. Krannert School of Management, Purdue University, 403 W. State Street, West Lafayette, IN 47907, USA;2. Alliance Manchester Business School, University of Manchester, Crawford House, Booth Street East, Manchester M13 9PL, UK;1. Grenoble Ecole Management (GEM), Rue Pierre Sémard, 38003 Grenoble, France;2. GREThA UMR CNRS 5113, University of Bordeaux, Avenue Leon Duguit, 33608, Pessac Cedex, France;3. INGENIO (CSIC-UPV) Universitat Politècnica de València, Camino, de Vera s/n, 46022 Valencia, Spain;4. Universitat de València, Dep. de Direcció d''Empreses ''Juan Jose Renau Piqueras'', Avda. Tarongers s/n, 46022, Valencia, Spain |
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| Abstract: | We test the hypothesis that managers who face a high termination risk make less risky investments than the managers who face a low termination risk. A 10% increase in our measure of termination risk is associated with a 5%–23% decline in stock returns volatility for the median firm in our sample. We also find that for CEOs who are more likely to be fired in the event of investment failure, the inhibiting effect of termination risk appears to offset the positive effect of convexity of managerial compensation on managerial risk taking. These results are robust to alternative definitions of forced turnover and various measures of firm performances. |
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