CEO Risk-Taking and Socioemotional Wealth: The Behavioral Agency Model, Family Control, and CEO Option Wealth

• Published in: Journal of management Vol. 45; no. 4; pp. 1713 - 1738
• Main Authors: Gomez-Mejia, Luis R., Neacsu, Ionela, Martin, Geoffrey
• Format: Journal Article
• Language: English
• Published: Los Angeles, CA SAGE Publications 01.04.2019; Sage Publications Ltd; Southern Management Association
• Subjects: Behavior; Business administration; Equity; Family owned businesses; Financial incentives; Humanities and Social Sciences; Predictive validity; Risk; Risk behavior; Risk preferences; Risk taking; Understanding; Wealth; socioemotional wealth; mixed gamble; agent risk-taking; behavioral agency; family principal
• ISSN: 0149-2063; 1557-1211
• DOI: 10.1177/0149206317723711

We combine behavioral agency and family business literature to analyze the role of dominant firm principals in constraining the managerial agent’s (CEO’s) response to equity-based pay. Behavioral agency research has made progress in understanding CEO risk behavior in response to equity-based incentives and family firm risk behavior driven by concentrated socioemotional and financial firm-specific risk bearing. However, both literatures have evolved independently, which has limited our understanding of how the risk bearing of agent and principal influences the predictions of the behavioral agency model (BAM). We combine these literatures in order to enhance BAM’s predictive validity with regard to firm risk-taking as a function of both agent and principal risk preferences. Our findings suggest that family principals are more likely than nonfamily principals to constrain CEO risk behavior that is perceived as immoderate (excessively risk averse or excessively risk seeking). We also offer evidence that CEO ties to the family influence the CEO’s response to equity-based incentives. In doing so, we offer refinements to BAM’s formulation and advance our understanding of the unique nature of agency problems within family firms.