TY - JOUR
T1 - CEO compensation incentives and playing it safe
T2 - evidence from FAS 123R
AU - Carline, Nicholas F.
AU - Pryshchepa, Oksana
AU - Wang, Bo
PY - 2023/1/19
Y1 - 2023/1/19
N2 - 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.
AB - 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.
U2 - 10.1017/S0022109023000017
DO - 10.1017/S0022109023000017
M3 - Article
SN - 0022-1090
JO - Journal of Financial and Quantitative Analysis
JF - Journal of Financial and Quantitative Analysis
ER -