Investment, Idiosyncratic Risk, and Ownership

By Vasia Panousi, Dimitris Papanikolaou. 2011

642 citations recorded by the source corpus.

High-powered incentives may induce higher managerial effort, but they also expose managers to idiosyncratic risk. If managers are risk averse, they might underinvest when firm-specific uncertainty increases, leading to suboptimal investment decisions from the perspective of well-diversified shareholders. We empirically document that when idiosyncratic risk rises, firm investment falls, and more so when managers own a larger fraction of the firm. This negative effect of managerial risk aversion on investment is mitigated if executives are compensated with options rather than with shares or if institutional investors form a large part of the shareholder base.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/7d5adaee03466f5d5def2a8cd7f3915ade6a60c7

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Citations in the corpus

Independent Director Reputation Incentives and Stock Price Informativeness (2017, background): “Prior literature documents the relationship between idiosyncratic risk and shareholder rights, ownership structure, and board structure (Ferreira and Laux, 2007; Ferreira, Ferreira, and Raposo, 2011; Panousi and Papanikolaou, 2012).”
Economic policy uncertainty and firm-level investment (2014, positive): “Panousi and Papanikolaou (2012) show that firm-level idiosyncratic risk (volatility in stock price not explained by market and industry sector stock price) is negatively associated with investment by U.S. firms over 1970-2005.3 Temple et al. (2001) distinguish between the effects of macro and micro…”
Measuring Economic Policy Uncertainty (2016, neutral): “1 See, for example, evidence of counter-cyclical volatility in: macro stock returns in Schwert (1989); in firm-level stock returns in Cambell et al. (2001), Bloom, Bond and Van Reenen (2007) and Bekaert et al.”
Policy Uncertainty and Mergers and Acquisitions (2017, neutral): “Hartman (1972), Abel (1983), and Caballero (1991) argue the-”
Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk (2019, background): “16The assumption of how to allocate pure rents is borrowed from Romei (2015). Attaching the rents in the economy to an exogenously determined group of households instead of distributing it with the factor incomes for capital or labor has the advantage that the factor prices and thus factor supply de”
Dynamic Agency and the q Theory of Investment (2012, neutral): “t e r(s t) (dDt + (1 )dXt) + e r( lKt ; (29)”