A Behavioral Agency Model of Managerial Risk Taking

ABSTRACT: We examine the extent to which the behavioral agency model reflects the relation between greater risk-bearing in stock option compensation and managerial risk-taking. The behavioral agency model predicts that managers with greater wealth at stake will avoid risky projects that threaten their wealth. This greater risk-bearing effect moderates the problem-framing effect, which predicts that loss-averse managers will be more (less) risk-taking when choosing among loss (gain) projects. Using a 2 × 2 between-subjects experiment with 108 M.B.A. students acting as managers, we find that managers are more risk-taking in the loss context than in the gain context when they have at-the-money stock options but not when they have wealth at stake through in-the-money stock options. Further, we find that managers with in-the-money stock options are less risk-taking than managers with at-the-money stock options in the loss context. These findings support the behavioral agency model prediction that greater risk-bearing in stock option compensation (moving from at-the-money stock options to in-the-money stock options) reduces the problem framing effect on risk-taking behavior, particularly when the firm faces a loss decision context. Our results point to the importance of considering the implications of risk-bearing in stock option compensation for managers choosing risky projects that affect firm value.

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A Behavioral Agency Model of Managerial Risk Taking

Academy of Management Review ◽

10.5465/amr.1998.192967 ◽

1998 ◽

Vol 23 (1) ◽

pp. 133-153 ◽

Cited By ~ 686

Author(s):

Robert M. Wiseman ◽

Luis R. Gomez-Mejia

Keyword(s):

Risk Taking ◽

Agency Model ◽

Managerial Risk ◽

Behavioral Agency

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"CEO Risk Taking in Family Firms: The Behavioral Agency Model, Family Control and CEO Option Wealth"

Academy of Management Proceedings ◽

10.5465/ambpp.2014.11660abstract ◽

2014 ◽

Vol 2014 (1) ◽

pp. 11660

Author(s):

Ionela Neacsu ◽

Luis R Gomez-Mejia ◽

Geoff Martin

Keyword(s):

Risk Taking ◽

Family Firms ◽

Agency Model ◽

Family Control ◽

Model Family ◽

Behavioral Agency

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Not all Risk Taking is Born Equal: The Behavioral Agency Model and CEO's Perception of Firm Efficacy

Human Resource Management ◽

10.1002/hrm.21624 ◽

2014 ◽

Vol 54 (3) ◽

pp. 483-498 ◽

Cited By ~ 18

Author(s):

Geoffrey Martin ◽

Nathan Washburn ◽

Marianna Makri ◽

Luis R. Gomez-Mejia

Keyword(s):

Risk Taking ◽

Agency Model ◽

Behavioral Agency

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CEO Risk-Taking and Socioemotional Wealth: The Behavioral Agency Model, Family Control, and CEO Option Wealth

Journal of Management ◽

10.1177/0149206317723711 ◽

2017 ◽

Vol 45 (4) ◽

pp. 1713-1738 ◽

Cited By ~ 21

Author(s):

Luis R. Gomez-Mejia ◽

Ionela Neacsu ◽

Geoffrey Martin

Keyword(s):

Risk Behavior ◽

Risk Taking ◽

Family Firms ◽

Family Influence ◽

Firm Risk ◽

Dominant Firm ◽

Agency Model ◽

Family Control ◽

Unique Nature ◽

Behavioral Agency

We combine behavioral agency and family business literature to analyze the role of dominant firm principals in constraining the managerial agent’s (CEO’s) response to equity-based pay. Behavioral agency research has made progress in understanding CEO risk behavior in response to equity-based incentives and family firm risk behavior driven by concentrated socioemotional and financial firm-specific risk bearing. However, both literatures have evolved independently, which has limited our understanding of how the risk bearing of agent and principal influences the predictions of the behavioral agency model (BAM). We combine these literatures in order to enhance BAM’s predictive validity with regard to firm risk-taking as a function of both agent and principal risk preferences. Our findings suggest that family principals are more likely than nonfamily principals to constrain CEO risk behavior that is perceived as immoderate (excessively risk averse or excessively risk seeking). We also offer evidence that CEO ties to the family influence the CEO’s response to equity-based incentives. In doing so, we offer refinements to BAM’s formulation and advance our understanding of the unique nature of agency problems within family firms.

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Managerial Risk Taking

Journal of Management ◽

10.1177/0149206316671583 ◽

2016 ◽

Vol 43 (1) ◽

pp. 137-169 ◽

Cited By ~ 73

Author(s):

Robert E. Hoskisson ◽

Francesco Chirico ◽

Jinyong (Daniel) Zyung ◽

Eni Gambeta

Keyword(s):

Agency Theory ◽

Risk Taking ◽

Basic Assumption ◽

Theory Of The Firm ◽

Critical Aspect ◽

Agency Model ◽

Upper Echelons Theory ◽

Managerial Risk ◽

Top Managers ◽

And Performance

Managerial risk taking is a critical aspect of strategic management. To improve competitive advantage and performance, managers need to take risks, often in an uncertain environment. Formal economic assumptions of risk taking suggest that if the expected values for two strategies are similar but one is a greater gamble (uncertain), managers will choose the strategy with a more certain outcome. Based on these assumptions, agency theory assumes that top managers should be compensated or monitored to achieve better outcomes. We review the theory and research on agency theory and managerial risk taking along with theories that challenge this basic assumption about risk taking: the behavioral theory of the firm, prospect theory, the behavioral agency model and the related socioemotional wealth perspective, and upper echelons theory. We contribute to the literature by reviewing and suggesting research opportunities within and across these theories to develop a comprehensive research agenda on managerial risk taking.

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