Does economic policy uncertainty influence executive risk-taking incentives?

Pattanaporn Chatjuthamard, Patcharawalai Wongboonsin, Kritika Kongsompong, Pornsit Jiraporn

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

Abstract

We explore the effect of economic policy uncertainty (EPU) on managerial risk-taking incentives. Our analysis shows that EPU leads to more powerful risk-taking incentives. A rise in EPU by one standard deviation raises vega by 18.88%. Economic uncertainty, coupled with their own inherent risk aversion, motivates managers to be extra cautious during uncertain times, resulting in sub-optimal risk-taking. To offset this tendency for too little risk, firms provide more powerful risk-taking incentives to induce managers to be more aggressive. Further analysis confirms the results, including an instrumental-variable analysis, random-effects analysis, propensity score matching, and using two alternative measures of uncertainty.

Original languageEnglish (US)
Article number101385
JournalFinance Research Letters
Volume37
DOIs
StatePublished - Nov 2020

All Science Journal Classification (ASJC) codes

  • Finance

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