Research in Asset Allocation
Date Issued
2011
Date
2011
Author(s)
Tsai, Chia-Fen
Abstract
In this thesis, I focus on how the presence of income risks from sources such as performance-based pay or equity incentive contracts influence employees’ and top managers’ portfolio allocations. Firstly, utilizing comprehensive data on investor portfolio holdings and employer information from Taiwan, I provide novel evidence on how employer-level risks influence employees’ portfolio choices. Individuals employed at listed companies with greater return volatilities are less likely to invest in equities in general and in the employer stocks in particular. Consequently, such investors invest a smaller fraction of their financial assets in the stock market and in employer stocks.
Secondly, this thesis tests whether a top manager with more diversified equity portfolios is willing to hold a larger share of financial wealth in the employer’s stock compared with a top manager with less diversified equity portfolios. In addition, this paper investigates whether top managers with more diversified equity portfolios are more willing to implement a higher leverage ratio than top managers with less diversified equity portfolios. In the thesis, I propose that the managerial portfolio equity incentive is positively related to the degree of managerial personal diversification. This result confirms that firm risk is an important factor in understanding a manager’s portfolio decisions. In addition, there is a significant and positive relationship between the firm’s debt ratio and the degree of personal diversification among top managers. The evidence gathered in this study supports the conclusion that managerial risk aversion, as well as the perceived firm risk to the manager’s financial wealth, affects firm-level risk reduction decisions.
Subjects
Portfolio choices
Stock holdings
Employer Stock Risk
Managerial personal diversification
Equity incentives
Firm financing policies
Type
thesis
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