Managerial incentives, net debt and investment activity in all-equity firms

Purpose – The purpose of this paper is to examine the impact of managerial risk exposure on capital structure selection (net debt, or debt minus cash) as well as return on assets, capital expenditures, research and development expenditures and stock price performance. Design/methodology/approach – The paper compares a sample of 123 all-equity firms to a set of matching levered firms selected on the basis of industry, market cap and market-to-book assets. Managerial incentives are measured using the delta and vega of the manager's stock and option holdings. Findings – Net debt levels decline as CEO wealth sensitivity to stock price changes (delta) increases. However, the paper finds no differences between the all-equity firms and their levered matching firms in terms of return on assets, capital expenditures, R&D expense, or long run stock price performance. Research limitations/implications – Findings are consistent with the idea that managerial incentives drive net debt decisions even among all-equity firms. However, given that there are no differences between the sample firms and their matched firms in terms of investment or stock price performance, the effect of managerial risk aversion appears to be confined to financial policy. Originality/value – The paper uses modern methods for measuring managerial risk exposure to revisit the literature on all-equity firms, and show that managerial risk exposure affects the net debt decision in these firms.