An experimental analysis of risk-shifting behavior

Pablo Hernandez-Lagos, Paul Povel, Giorgo Sertsios

Research output: Contribution to journalArticle

Abstract

We study risk-shifting behavior in a laboratory experiment, a setup that overcomes methodological hurdles faced by empiricists in the past. The participants are high-level managers. We observe risk shifting in a simple setup, but less so in a setup with a continuation value. Reputation effects also reduce risk shifting. When combined, a continuation value and reputation effects eliminate risk shifting. Our findings shed light on environments in which risk shifting is unlikely to happen, and why earlier studies produced conflicting results. In particular, our findings show that managers' concerns with their own reputations are an important factor that mitigates risk shifting.

Original languageEnglish (US)
Pages (from-to)68-101
Number of pages34
JournalReview of Corporate Finance Studies
Volume6
Issue number1
DOIs
StatePublished - Jan 1 2017

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Experimental analysis
Risk-shifting
Reputation effect
Managers
Factors
Value effect
Laboratory experiments

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance
  • Business and International Management

Cite this

An experimental analysis of risk-shifting behavior. / Hernandez-Lagos, Pablo; Povel, Paul; Sertsios, Giorgo.

In: Review of Corporate Finance Studies, Vol. 6, No. 1, 01.01.2017, p. 68-101.

Research output: Contribution to journalArticle

Hernandez-Lagos, Pablo ; Povel, Paul ; Sertsios, Giorgo. / An experimental analysis of risk-shifting behavior. In: Review of Corporate Finance Studies. 2017 ; Vol. 6, No. 1. pp. 68-101.
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