Do Risk-Taking Incentives Induce CEOs to Invest? New Evidence from Acquisitions

This paper examines the effect of risk-taking incentives on acquisition investments. We find that CEOs with risk-taking incentives are more likely to invest in acquisitions. Economically, an inter-quartile range increase in vega translates into an approximately 4.8% enhancement in acquisition investments, consistent with the theory that risk-taking incentives induce CEOs to undertake investments. Corporate governance does not affect the association between vega and acquisition investments. The positive relationship between vega and acquisitions is confined only to non-overconfident CEOs subgroup and vested options. Risk-taking incentives do not promote internal investments. Finally, vega is positively related to bidder announcement returns.