Autoplay Next video from Max length

Stavros Panageas on Balancing Incentives

1,103 views · Published 4 April 2012 · 5:31 · Indexed 31 October 2026

Channel: The University of Chicago · 2012 · Education

Stavros Panageas, assistant professor of Finance at the University of Chicago Booth School of Business, discusses how contracts with distorted payoffs should encourage a long-term view to offset risk shifting, which can occur when firms face financial distress.

When a company is about to go broke, it might be tempted to take on risky projects that promise high returns. Shareholders reap the benefits of this gamble if the projects succeed, but otherwise creditors bear the loss. Shareholders are essentially taking a bet with the creditors' money.

This situation arises whenever the expected payoffs of managers' investment choices allow them to cash in on the upside, but avoid being penalized for the downside. Compensation contracts for managers are sometimes structured in a way that generates such lopsided payoffs.

A study by Panageas and Mark M. Westerfield of the University of Southern California, argues that the implicit or explicit length of a contract is an important factor for this behavior.

For more information, visit http://www.chicagobooth.edu/capideas/may-2012/panageas.aspx.

➡ Subscribe: http://bit.ly/UCHICAGOytSubscribe

About #UChicago:
Since its founding in 1890, the University of Chicago has been a destination for rigorous inquiry and field-defining research. This transformative academic experience empowers students and scholars to challenge conventional thinking in pursuit of original ideas.

#UChicago on the Web:
Home: http://bit.ly/UCHICAGO-homepage
News: http://bit.ly/UCHICAGO-news
Facebook: http://bit.ly/UCHICAGO-FB
Twitter: http://bit.ly/UCHICAGO-TW
Instagram: http://bit.ly/UCHICAGO-IG

University of Chicago on YouTube:
https://www.youtube.com/uchicago ***

ACCESSIBILITY: If you experience any technical difficulties with this video or would like to make an accessibility-related request, please email [email protected].

Stavros Panageas on Balancing Incentives

More from this channel