A behavioral agency model of managerial risk taking

Abstract

Building on agency and prospect theory views, we construct, in this article, a behavioral agency model of executive risk taking. In the model we combine elements of internal corporate governance with problem framing to explain executive risk-taking behavior. The model suggests that executive risk taking varies across and within different forms of monitoring and that agents may exhibit risk-seeking as well as risk-averse behaviors. We develop specific propositions that combine monitoring with performance and the framing of strategic problems to explain executive choices of strategic risk. The resulting propositions enhance and extend the agency-based corporate governance literature on executive risk taking.