Measuring Investment Distortions when Risk-Averse Managers Decide Whether to Undertake Risky Projects
Year: 2002
Type: report
Abstract: This paper examines distortions in corporate investment decisions when a new project changes firm risk.It presents a dynamic model in which a self-interested, risk-averse manager makes investment decisions at a levered firm.The model, calibrated using data from public firms, is used to estimate the magnitude of distortions in investment decisions.Despite potential wealth transfers from debtholders, managers compensated with equity prefer safe projects to risky ones.Important factors in this decision are the expected changes in the values of future tax shields and bankruptcy costs when firm risk changes.We also evaluate the extent to which this effect varies with firm leverage, managerial risk aversion, managerial non-firm wealth, project size, debt duration, and the structure of management compensation packages.
DOI: 10.3386/w8763
Institutions: University of Southern California, National Bureau of Economic Research, University of Arizona, University of Kansas, University of Illinois Urbana-Champaign, The University of Texas at Dallas, Federal Reserve Bank of New York, University of Rochester, New York University, The University of Texas at Austin, Texas A&M University
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2889998637