Employment Risk, Compensation Incentives And Managerial Risk Taking

The authors examine the influence of incentives due to employment risk and due to compensation on managerial risk taking. Their empirical investigation of the risk taking behavior of equity fund managers indicates that managerial risk taking crucially depends on the relative importance of these incentives. When employment risk is high, midyear losers tend to decrease risk relative to leading managers in order to prevent potential job loss. When employment risk is low, compensation incentives become more relevant and midyear losers increase risk in order to catch up with the winners.