through which shocks may propagate is through the effect of past gains and losses on investors’ risk aversion. We test this … a simple model that analyzes the effect of heterogeneous changes in investors’ risk aversion on portfolio decisions and …

High-powered incentives may induce higher managerial effort, but they also expose managers to idiosyncratic risk. If … managers are risk averse, they might underinvest when firm-specific uncertainty increases, leading to suboptimal investment … decisions from the perspective of well-diversified shareholders. We empirically document that when idiosyncratic risk rises …