TY  - JOUR
AU  - Parrino,Robert
AU  - Poteshman,Allen M.
AU  - Weisbach,Michael S.
TI  - Measuring Investment Distortions when Risk-Averse Managers Decide Whether to Undertake Risky Projects
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8763
PY  - 2002
Y2  - January 2002
UR  - http://www.nber.org/papers/w8763
L1  - http://www.nber.org/papers/w8763.pdf
N1  - Author contact info:
Robert Parrino
McCombs School of Business
University of Texas
Austin, TX 78712
Tel: 512/471-5788
E-Mail: Parrino@mail.utexas.edu

Allen Poteshman
D.E. Shaw & Co.
39th Floor, Tower 45
120 West Forty-Fifth Street
New York, NY  10036
Tel: (217) 778-6064
E-Mail: poteshman@gmail.com

Michael Weisbach
Department of Finance
Fisher College of Business
Ohio State University
2100 Neil Ave.
Columbus, OH  43210
Tel: 614/292-3264
E-Mail: weisbach.2@osu.edu
AB  - This paper examines distortions in corporate investment decisions when a new project changes firm risk.  It presents a dynamic model in which a self-interested, risk-averse manager makes investment decisions at a levered firm.  The model, calibrated using data from public firms, is used to estimate the magnitude of distortions in investment decisions.  Despite potential wealth transfers from debtholders, managers compensated with equity prefer safe projects to risky ones.  Important factors in this decision are the expected changes in the values of future tax shields and bankruptcy costs when firm risk changes.  We also evaluate the extent to which this effect varies with firm leverage, managerial risk aversion, managerial non-firm wealth, project size, debt duration, and the structure of management compensation packages.
ER  -