Investment, idiosyncratic risk, and ownership

Panousi, Vasia and Papanikolaou, Dimitris (2009): Investment, idiosyncratic risk, and ownership.

Abstract

We find a significant negative effect of idiosyncratic stock-return volatility on investment. We address the endogeneity problem of stock return volatility by instrumenting for volatility with a measure of a firm's customer base concentration. We propose that the negative effect of idiosyncratic risk on investment is partly due to managerial risk aversion, and find that the negative relationship between idiosyncratic uncertainty and investment is stronger for firms with high levels of insider ownership. Several mecha nisms can mitigate this effect namely the use of option-based compensation and shareholder monitoring. We find that the investment-idiosyncratic relationship is weaker for firms that make use of option-based compensation, and insider ownership does not matter for firms primarily held by institutional investors.

• Item Type: MPRA Paper
• Language: English
• Keywords: investment, idiosyncratic risk, volatiltiy, ownership, stock-options
• Subjects: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions

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