XXVI Edition

14-15-16 December 2017"

Disciplining Entrenched Managers through Corporate Governance Reform: Implications for Risk-Taking Behavior

Pryshchepa Oksana, The University of Birmingham

Prior studies find that entrenched managers destroy firm value by choosing lower risk negative NPV projects. In this paper, I argue that enhanced monitoring by boards and internal controls established following the passage of the Sarbanes-Oxley Act of 2002 (SOX) mitigated risk-related agency conflicts prevalent in entrenched firms. I construct the risk measure that is based on variances and covariances of the industries in which the firm operates and more accurately reflects managerial risk-taking decisions. Using this measure, I examine changes in risk-taking and investment policies and performance in firms with entrenched management following SOX. I find that, by imposing an additional layer of discipline on managers, SOX increased managers' willingness to take on riskier, but more value-enhancing projects that were previously stifled in entrenched firms.

Area: Corporate Governance (Nedcommunity Award)

Keywords: Agency conflicts; Risk-taking; Managerial Entrenchment; Sarbanes-Oxley Act; Corporate Governance Reform.

Il paper è coperto da copyright.

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