CEO compensation incentives and playing it safe: evidence from FAS 123R

Nicholas F. Carline, Oksana Pryshchepa, Bo Wang

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Abstract

This paper uses FAS 123R regulation to examine how reduction in CEO compensation incentives affects managerial `playing-it-safe’ behavior. Using proxies reflecting deliberate managerial efforts to change firm risk, difference-in-difference tests show that affected firms drastically reduce both systematic and idiosyncratic risks, leading to an 8% decline in total firm risk. These reductions in risk are achieved by shifting to safer, but low-Q, segments while closing the riskier ones, without significant changes in investment levels. Our findings suggest that decrease in risk-taking incentives provided by option compensation, when not compensated for by alternative incentives or governance mechanisms, exacerbates risk-related agency problem.
Original languageEnglish
JournalJournal of Financial and Quantitative Analysis
Early online date19 Jan 2023
DOIs
Publication statusE-pub ahead of print - 19 Jan 2023

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