Question

In the agency relationship between managers and stockholders in a corporation, why do stockholders want to take more risk than managers and why do managers want to take less risk than stockholders?

Answer 1

Taking less risk by managers is a safe behaviour as getting risky on decision could cost the company it's reputation and overall valuation. It could also hamper the company's growth ans well and diminishes investors from bringing in investments for the firm.

While shareholders like to take more risks than the managers because the shareholders have their portfolio diversified hence spreading the risks to multiple securities whereas manager's career could be adversely affected by more risk taking attitude.

Managers do need to take some calculated risk in order to create value for the stockholder .

The more general conflict between shareholders and managers are in the way managers make more money in form of wages and benefits, the less a stockholder would make make in bottom line net income.

Also, Managers are more interested in higher revenue generation to make more fprofit for thmeselves .

On the contrary , shareholders may want to invest in many companies to lessen the risk , so if one company goes bankrupt , they would have hedged their position with other investments. This is the reason , stockholders could take more risks than the managers.