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so my research basically looks at why managers may not always act in the best interest of
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shareholders uh and what are things that investors can do to sort of discourage bad behavior by managers now generally
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speaking we think of there as being sort of three main ways in which managers behave poorly one is that they may not
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exert enough effort right because ex effort's costly if we don't monitor them
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as an investor they won't exert it the second is that they may actually take
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actions that benefit themselves but not the shareholders Okay the third is where
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my research is focused and that is that managers may do what my co-author and I call play it safe and that they may not
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take the risk that are necessary to create value for the shareholders now managers may not do that because they
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have a lot tied up into these companies if it goes uh South their career could be adversely affected their personal
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wealth could be affected much more so than a diversified shareholder so they're going to want to take less risk
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so my co-author are trying to determine whether this plan it safe is sort of a Salient problem for investors and the
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way which we did that is we looked at well what are firms do when they become protected from a hostile takeover okay
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so what happened is that in the US a bunch of different states pass these laws which made it difficult to do a
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takeover of a company located in those States uh now that's interesting because
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we and finance think of a takeover as sort of a a disciplining device on a manager and that if that manager is
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performing poorly uh doing things that destroy shareholder value it's going to
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push down their share price and it's going to basically make it easier for another group of investors to come in
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buy out the company fire the manager and improve value so now if I'm a manager
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and I'm not worried about that anymore because my state just passed a law that
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kind of protects me from a takeover I can now act more on my own interest rather than that of shareholders so the
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question is is well what do managers do when they become protected and so what my co-author and I found is that when
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they became protected by these state level laws they took less risk uh we observe stock volatility go down we
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observe cash Holdings go up we also observed them begin doing more diversifying Acquisitions which prior
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research is shown as one way in which managers try to reduce their risk and it doesn't look like this behavior is in
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the interest of shareholders a we can see that these Acquisitions have negative announcement returns uh and we
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can also see that they're concentrated among the companies where we would think
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that this planet safe is more important firms that at greater risk of distress and firms where the managers have more
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personal exposure to the company's risk I would say one of the key takeaways of our research is that this
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plane at Behavior by managers this incentive to not take on risk that may create value can have implications for a
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company's overall value investment and growth right if you think about it in
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order to create value for shareholders at some level you have to take risk products that have turned out to be
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great in the past someone took a risk to create that product if managers aren't
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doing that then they're not necessarily creating value uh another sort of takeaway is that this planet safe in
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general is probably going to be very hard to detect for a shareholder right we don't observe what are the the
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Investments that the managers choose in between and we don't observe what the
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expected returns are what the risk are we don't know if that managers may be
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sort of avoiding certain projects that could create a lot of value but they're
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worried about the risk and the personal exposure to that risk or you know we see
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these companies holding more cash now these companies say they're holding cash
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because they're trying to make sure they have investment you know the cash they
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to do an investment if it comes along is that true or is it they're holding the
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cash because they're worried about distress and they're just trying to make
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sure the company doesn't run into problems in the future and it's not really creating value for shareholder
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that's hard for a shareholder to know but sort of what our research is trying
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to point out is that managers May in general be trying to take on less risk than what we' prefer them to do and
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therefore it might be important to actually encourage more risk-taking I wouldn't say it surprised
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me but I suspect it would surprise others and that conclusion was is that we observed that this sort of plan at
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safe Behavior by managers was concentrated among those that had the largest ownership stakes in their
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companies now typically we would teach our students here at Wharton that if you want to encourage managers to work hard
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and not waste cash you give more stock in the company more of an ownership stake uh now it's true that that will
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make them work hard and not waste cash but what is often overlooked in practice is that it can actually make some
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problems worse particularly the planet safe by giving them more ownership you've just exposed them to more of the
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company's risk you've given them incentive more to play it safe and that's what we picked up in the data is
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that when they had more ownership Stakes this conflict appeared to be uh prevalent in the data
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so I would say one of the Practical implications of our findings is that as an investor as a shareholder if you
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don't think the manager is taking on actions that are going to create shold of value it's important to understand
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why they may not be doing that if you're going to try to solve it right I'll give
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you an example so the Wall Street Journal ran a really nice article last summer where basically the uh author of
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the article was bemoaning in their view that uh firms in the US and Entre in the
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US have become soft and risk and because these companies aren't taking risk in
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the US this is why the US growth and investment has been weak over the last 5 10 years but the question is is why
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aren't they taking these risk right if we as shareholders think it's because it
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just requires a lot of effort the managers don't want to exert that effort well then one solution is give more
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ownership in the company okay on the other hand if they're not taking that uh
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risk because they want to play it safe they're worried about their careers then
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the solution becomes quite different and that you don't necessarily want to give
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more ownership because that it just exposes them more of the firm's risk instead you might want to think about
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other things like granting them options which past research including my own has
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shown encourages risk-taking in terms of playing it safe in our research we looked at large US
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companies that are mostly public but my guess is that this planet safe is also Salient for entrepreneurs right so think
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of like a student that graduates from here at whorton right all of them are going to have an opportunity to go get a
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great job at a company that has a a nice salary good benefits and good health insurance now some of these students may
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also have a great idea for a new company or a new product that they could go do it instead but obviously going and
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starting your own company is risky and I would guess that many of these individuals don't go and do that uh and
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instead they just going to go take the safe job that has the salary and the fixed health benefits rather than go
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start a new company and I would term that as potentially playing it safe and I think it could be quite important
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uh I think probably the biggest misperception that our study might dispel is this idea that giving managers
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greater ownership stakes in their companies necessarily ensures that they behave in the best way right and that
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there's a lot of attention paid recently because of the financial crisis and that
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you want to give managers more ownership stake you want to give them these restricted stocks that tie them to the
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long-term risk of the company uh now that's probably going to get rid of some
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problems but it could actually make other problems worse and in particular playing it safe now if they're tied to
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the the long run risk of the company they have a lot more to worry about they may actually take on less risk than what
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we as shareholders want them to they may for go doing these projects that would create a lot of value just because
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they're risky I think one thing that's different about my research relative to other
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research on why managers might B misbehave is that most past researchers focused on the idea that managers don't
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exert enough effort uh and that they want to live what we call the quiet life they don't want to work hard uh whereas
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my research is showing that in fact managers may be exerting a lot of effort but this effort is not directed in ways
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that are necessarily trying to create shareholder value rather it's effort directed at maybe reducing the company's
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risk uh for the manager's personal benefit but not that of shareholders one thing that I've been
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thinking about looking at next which I haven't started yet was whether maybe
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the recent healthc care law has an effect on individual's choice to being entreprene rur right so if you think
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about it prior to the healthcare Lobby in pass if you're an individual and you
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start a company uh it's really hard to get health insurance as an individual
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and so your alternative was to go get that 9-to-5 job where you can at least have the health insurance uh now that
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the Law's passed and we have the marketplace and these it's much easier for individuals and my guess is that
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you're probably going to see a lot more people choosing to go and start their
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own companies knowing that they can get this health insurance without having to go get that steady 95 job
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