1 Behavioral Agency and Affect.docx

We advance behavioral agency theory by exploring the influence of mood or “affect” on the behavioral consequences of equity incentives. Drawing on insights from psychology and behavioral decision theory, we describe how affect influences agent risk behavior. We argue that positive affect amplifies both the extent to which executives reduce strategic risk taking in response to risk bearing and engage in strategic risk taking in response to incentives for further enrichment. Building again on the psychology literature, we describe how CEO accountability attenuates the influence of affect on CEO risk behavior in response to equity incentives. We test our expectations in a longitudinal dataset of CEO equity incentives and strategic risk taking by U.S. firms for the period 1994—2013